The potential end of the bond bull market, the return of value investing and short-term political newsflow continuing to rock markets are issues that investors will need to focus on in 2017, according to Whitechurch Securities. 
Ben Willis, head of research at the wealth management firm, predicts that next year will be marked by a VILE (Volatile Inflation and Low Expansion) investment climate that will necessitate some portfolio changes.
Both the Brexit negotiations and the advent of Trumponomics will create increased uncertainty next year, while Whitechurch believes that the rebound in commodity prices is likely to cause inflationary spikes across the globe. In the UK, this will be compounded by the weak pound.
Furthermore, while governments across the globe are expected to shift their stimulus efforts from monetary policy to fiscal policy, this is not tipped to prompt a significant uplift to economic growth in 2017.
“However, we do believe that fundamental changes in the political backdrop will alter the economic outlook and how an investment portfolio needs to be positioned going forward,” Willis said. “Anyone positioning a portfolio based on past performance could be in for a tough time.”
In the following article, Willis highlights six themes that he thinks will prove particularly important for investors next year.
The end of the bull market for bonds?
Developed market government bonds have enjoyed a 30-year bull run, which many have warned will soon start to peter out. Since the start of 1999 (which is as far back as our data goes), the Barclays Sterling Gilts index has made a 160.24 per cent total return, outpacing the FTSE All Share.
Performance of indices since 1999
Source: FE Analytics
While government bonds have been “a great place to be invested”, Willis points to rising inflation in many parts of the globe as a sign of looming weakness for the asset class.
“Inflation is the enemy of the bond market and signs of inflation emerging towards the end of 2016 have seen investors predicting the end of a 30-year bull market for fixed interest,” he said.
“This seems somewhat premature, but there is no doubt that the risks to low yielding government bonds look high in return for little reward. It will be important to manage bond exposure carefully in 2017, add in inflation protection and minimise interest rate risk.”
The thirst for income
The Federal Reserve recently lifted the US base rate by 0.25 per cent but the Bank of England, European Central Bank and the Bank of Japan have maintained rates at historic low and are expected to keep them at these levels for some time to come.
In Whitechurch’s view, this means that investors’ search for yield – which has been a strong force in market over the recent yield-suppressed times – is likely to continue unabated, especially as inflation is expected to move beyond the Bank’s official target.
Willis said: “We do not see an economic climate strong enough to support interest rate rises across the globe, with the US perhaps the only major economy able to support a modest increase.
“With inflation eroding miserly returns from saving accounts and bond markets exposed to inflationary risk we maintain our favour for dividend producing shares at home and overseas. But companies who can grow dividends faster than inflation will be favoured over higher yielding bond proxies.”
Managing currency risk
Recent years have seen investment returns increasingly buffeted by currency movements, with the weakening of the pound and the boost to international-facing stocks thanks to the Brexit referendum being one of the more obvious examples.
Performance of US dollar vs sterling over 2016
Source: FE Analytics
“Predicting currencies is a thankless task but it is important to manage the risks. Sterling could remain under pressure but it is close to a 30-year low versus the dollar,” Willis added.
“If the pound should rally on better than expected newsflow, then a lot of this years’ top performers could be bottom of the pile in 2017. We will hedge currency in some overseas equity exposure to manage potential currency risk.”
Re-emergence of value investing
Value investing has gone through a tough few years, with quality-growth being the place to be invested. In a chart that should be all-too-familiar by now, we can see how growth has beaten value over the past five years but has started to lose its lead over the last few months.
However, as FE Trustnet has pointed out on a number of occasions, many commentators expect this rotation out of growth and back into value to run for some time yet. Whitechurch is also in that camp.
Performance of indices over 3yrs
Source: FE Analytics
“High quality global leading businesses that can grow profits in a harsh economic backdrop have been the darlings of the stock market over the past decade. However, with optimism over higher economic growth and a return of inflation there are signs that undervalued cyclical stocks could be returning to favour,” Willis said.
“This change in style bias has emerged in recent months and if it continues then some of the top performing active funds may struggle. We have been adding ‘value’ funds as part of our barbell strategy across global stock markets.”
A return to stock-picking
The past year has proven to be a difficult one for many active managers, with indices hitting new record highs but active funds being wrong-footed by surprise events such as the Brexit result and the election of Donald Trump as US president.
FE Analytics shows the average member of the IA UK All Companies sector has underperformed the FTSE All Share with a 9.43 per cent total return over the year to date. In contrast, the index has made 14.70 per cent over 2016.
Performance of sector vs index over 2016
Source: FE Analytics
“However, the tailwinds that have driven UK mega-caps in 2016 (weak pound and a recovery in oil and commodity prices) may not drive indices higher in 2017,” Willis said.
“With US exporting blue chips facing headwinds from Trumponomics – compared to smaller domestically focused companies – and a potential for recovery in value stocks we believe good stock-pickers looking for contrarian special situations have good opportunities to outperform in 2017.”
Employing a barbell approach
Given that Whitechurch expects 2017 to be another year where short-term political newsflow drives markets, Willis suggests that “having no strong view is probably the right view”.
“Rather than trying to make big calls on unpredictable factors, our focus is to take a ‘barbell approach’ and diversify risks across portfolios, assessing which assets are priced to offer the best risk adjusted returns on a longer-term view,” he concluded.