Why investors need an active approach from here

We predict that the global economic expansion will continue well into 2018. This is because the economic cycle has not yet fully matured in our view so, although it may be closer to the end than it is to the beginning, there is still some way left to go across all major economies.

We expect inflation to remain relatively low for the foreseeable future and, despite having reached a tipping point on interest rates, the monetary policies from most central banks remain relatively relaxed.

Overall, globally the economic environment is still pretty positive, offering a good base from which companies can grow profits. This in turn will support the case for equity investment so we anticipate equity markets to reach new highs in 2018.

Emerging market equities will most likely outperform the more established, developed markets.

We especially like frontier markets including Vietnam and Bangladesh where the demographics are strong in these regions with a young population that is growing larger. This offers huge opportunities for growth and is diametrically opposed to western economies where, as is well documented, we have mature ageing populations.

Other emerging markets we are keen on include Russia. We are holding equity positions here currently as valuations are looking especially cheap.

We’ve seen a lot of good news coming out over the last stretch of 2017 – for example, the purchasing managers’ indices confirmed ongoing global economic strength.

Solid data has also been coming out of the US with republican tax proposals going down well in commercial circles so, perhaps in spite of Trump’s perceived gaffes, American businesses are gaining confidence. Indeed, it has been mooted that smaller businesses in particular are being propped up by the expectation that they will soon be paying less tax in the US.

Aside from the US, we are expecting more good news to come out of China in 2018. China is a market that many eyes will be watching this coming year as some commentators have been predicting disaster for months, all to no avail. We believe China still has many good qualities underpinning the fundamental investment case so, provided this is not undermined by a build-up of debt within the system, we will be sticking for now.

In terms of investment themes, some areas have done better than others recently but the catch is that they have made certain markets start to look expensive.

The United States is a good example of this effect with technology being the obvious culprit for pushing up prices. Technology firms have performed extremely well and proved very resilient, effectively propping up the entire large cap end of the US market and enabling the sector to outperform small caps by some margin.

For 2018, we will want to see robust corporate earnings to justify the higher price tags here and companies that fail to deliver on earnings are likely to take a share price battering as punishment.

We believe that the opportunities presenting themselves for 2018 require an active approach to investment management rather than passive. Whilst we do like ETFs, we are avoiding them at the moment because we feel the current investment climate requires a selective attitude – simply buying the market isn’t going to cut it in 2018.

Still, those investors who do spend time making considered stock picks should still prepare for more modest returns rather than ostentatious profits. Risks are also ever-present in the form of slowing growth, an uptick in inflation and unpredictable geopolitical risks. Trump’s spat with North Korea, Ukraine’s ongoing strife and - of course - Brexit are still bubbling away under the surface and could throw out stumbling blocks without warning during 2018.

Central banks could also tighten further in 2018 but, so far, have been measured in addressing how to unwind their balance sheets. However, sharper and faster than expected increases in interest rates are a real risk and some camps believe the market has underestimated just how fast the Federal Reserve will move when the time inevitably comes. Against this backdrop, we remain wary of anything other than very short dated and very high quality bonds.

Finally, recent years have been a period of rapid disruption, and whilst we expect this to continue throughout the coming year, challenges to established business models should throw up exciting opportunities.

Amazon’s meteoric rise through one-click shopping and next day delivery has been an excellent example of disruption to the high street model. Just look at Toys R Us.  Some established brands are now in a very difficult position and must keep pace with technological changes if they are to survive. In our view, many retail brands have not done enough to counter the massive business losses to tech-based challengers. We would not be surprised to see more scalps taken from the high street in 2018.

Our view is that we find ourselves moving in to the New Year feeling reasonably optimistic, but with a healthy dose of caution. 2018’s opportunities can be exploited through an active management approach, but we feel investors must brace themselves to take higher potential risks for lower expected returns.

In this environment, we find ourselves urging a degree of prudence and care in order to minimise the impact of any nasty shocks.