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Where NOT to invest in 2017

05 January 2017

Market commentators name the sectors they will be steering clear of in what looks set to be a challenging 2017.

By Jonathan Jones,

Reporter, FE Trustnet

US equities have emerged as the least popular asset class in 2017, according to industry experts polled by FE Trustnet, with property and the eurozone also worth avoiding.

While 2016 was a difficult year in terms of market sentiment, returns across the board were fairly robust, with many of the main equity markets ending the year in positive territory.

Yet, with the ramifications of last year’s unanticipated political events set to unfold in 2017, such as the start of Brexit negotiations and the inauguration of Donald Trump as US, investors may be forgiven for being unsure of where to invest.

Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said: “2017 promises to be a fascinating year, and following such strong returns in 2016 it wouldn’t be a surprise to see leaner ones in the next twelve months.”

Performance of indices over 1yr

 

Source: FE Analytics

As the above graph shows, the S&P 500 index was the strongest performing blue chip equity market of 2016 and is the best performer in four of the past six calendar years.

Despite this, half the industry commentators asked by FE Trustnet said they would avoid the asset class in 2017, noting high valuations and a lack of clarity over Donald Trump’s policies.

Morgan said: “In particular, UK investors should be cautious of chasing returns in North American funds. US exposure has been highly beneficial to portfolios over 2016 with a strong dollar turbo-charging market returns.”

“A bounce in the pound versus the dollar combined with any US market weakness would mean a reversal in fortunes,” he added.

John Husselbee, portfolio manager at Liontrust, questions “how long the honeymoon period will last” in relation to Donald Trump’s presidency.

He says while US equities outperformed again last year, “it’s unlikely to be one of the better asset classes of 2017”.

“I think as often said – most of the news is in the market. The US clearly has improved in terms of growth and the election of Donald Trump into the White House as of the next few weeks is one that has been seen to be pro-business, but I wonder how long investors will be willing to pay up for US large caps,” he said.

He adds that his portfolios are currently underweight the US because the medium to longer-term outlook for the asset class is not as attractive as others elsewhere.


Premier Asset Management portfolio manager Simon Evan-Cook says valuations are the main reason for investors to steer clear from the US.

“We’ve got form on this because if you had asked me last year, the year before that and the year before that I would have said to avoid US equities.”

“We’ve been heroically wrong about US equities every year for about four years but we’ve performed well in spite of that and this year we’re more adamant than ever.”

“One year we are going to end up being right and that will be a great year for us given that we own far less US equities than certainly most global funds and most multi-asset funds do.”

Indeed his five-crown rated Premier Multi-Asset Global Growth portfolio, has a 5 per cent weighting to the US, around 50 percentage points lower than the global index.

“The reason we are avoiding them is simply valuation. On a long-term basis we always look at the cyclically adjusted PE’s (price to earnings multiples) and they have been looking expensive for years but this year they look particularly expensive up at 28 times,” he explained.

“That has only been more expensive at the top of the tech boom and in 1929 so now on that basis it’s more expensive than it was in 2007 as well which is not a great omen.”

The other reason he is avoiding the US is the protectionist environment being created by Donald Trump, which he says has been overplayed.

“I think there has been a general knee-jerk reaction that as he is protectionist [his policies] are going to be okay for US equities and terrible for everywhere else but the thing is everything else has a valuation cushion whereas US equities don’t.”

Additionally, Evan-Cook says while Trump’s fiscal policies could be positive for US equities (and for the economy) valuations are factoring in an “amazing result” that those policies lead to “excellent” economic growth.

“If that happens then they are probably just about fair value if the best case scenario comes from Trump. If it’s not quite as good as people are imagining – if the fiscal policy isn’t effective or he can’t do as much as he wants to – then they look expensive.”

Charles Stanley Direct’s Morgan added that investors should be wary of buying into stocks that are “priced for perfection”.

“There is potential for disappointment in the economic stimulus plans of the Trump administration to upset markets, and a fractious political climate could also undermine the currently bullish sentiment,” he said.


Property

While most have issues with US equities heading into 2017, Wealth Club investment director Ben Yearsley says property remains an areas to avoid.

Performance of index over 1yr

 
Source: FE Analytics

Despite the sector producing a positive return in 2016, as the above graph shows, Yearsley says sentiment towards the sector is at an all-time-low.

“Last year was a fairly horrific year for property – not necessarily in returns because the sector delivered a positive return overall – but more in the sentiment surrounding the sector,” he said.

Following the EU referendum result investors fled the sector for fears of property prices plummeting, leading to many having to suspend trading and lock investors into the fund for a period of time.

“Add into that the uncertainty over Brexit and the propensity for UK property funds to invest a huge amount in London and prime property coupled with the talks of banks and other companies moving overseas and you have to say that the outlook for property is uncertain,” Yearsley said.

“Therefore why would you go into an uncertain asset class that’s already proven this year that you could get locked into a fund? All those factors at the moment make me unsure about the sector.”

While Yearsley doesn’t see property funds needing to shut down in the same way as they had to in the wake of the EU referendum, he says there is the potential for a gradual trickle of companies not taking up office space, rationalising, going abroad that will happen over a period of time.

“I don’t see a flash crash like June but I can’t get excited about it when you know that that is on the horizon. Will companies actually get up and leave? I don’t know but it’s a possibility so why take the risk in an asset class where you can get locked in for something that could happen.”


Eurozone

David Coombs, fund manager at Rathbones, says he would avoid eurozone equities heading into 2017, with political risks chief among his reasoning.

In 2016, the UK voted to leave the European Union, while a ‘no’ vote in the Italian referendum led to the resignation of prime minister Matteo Renzi and next year sees general elections in France, Germany and Holland.

He said: “I think obviously we have got some major elections in Europe this year as well documented but we are seeing already political incumbents starting to shift policy towards the more populist agendas.”

“Whether the more extreme parties on the right or the left win or not, clearly a lot of the incumbents are concerned so we are going to see some volatility around fiscal policies in Europe and a greater lack of certainty over what these policies will look like over the next three years.”

“I suspect monetary policy will stay very loose over this period to offset that but I do think that the political fallout will be quite high this year and will unsettle markets.”

“I think that’s negative for the euro as well. I am a long-term critic of the euro in any event because I think it is built upon very shaky foundations in the fact that you don’t have fiscal harmonisation underpinning the currency,” he added.

“And with monetary policy basically as zero the only way those economies can manipulate their economy is through fiscal policy now.”

Additionally, Coombs says the Brexit negotiations could impact the eurozone more than the UK, with the financial loss from the UK leaving needing to be picked up by other countries.

“The Brexit impact is also highly significant and is one of my reasons for avoiding the area. I think Brexit could potentially have a bigger impact on the Eurozone than it does on the UK,” he said.

He adds that despite growth beginning to show signs of life, he remains cautious due to the political risks mentioned above.

“I’m not saying that we won’t get pockets of excitement every now and again with some decent data points in a few countries but I think because we don’t know what the political agenda is going to be over the next two to three years I would look at the current data with an element of scepticism and nervousness,” the manager said.

“Don’t get me wrong there are some great European companies that you may want to buy at a stock level but in terms of allocating to a region and taking that currency exposure for a UK investors I’m not convinced the returns are going to warrant the risk that you are going to take.”


Greece 

Gaurav Gupta, model portfolio manager at Thesis Asset Management says Greece could become a factor again in 2016, following a few years of relative quiet.

“Greece has been off the radar throughout the most of 2016, but in 2017 we could see the Greece crisis flare up again as the economy remains bedraggled,” he explained.

“Most recently the Athens government made a surprise payment to pensioners even though this requires additional borrowing from the EU or further borrowing from the money markets (which is not currently an option) to balance the budget.”

“To investors, Greek debt looks less attractive especially considering the on-going negotiations between Greece and its creditors.”

“After two large bailouts in 2010 and 2012 from the EU and the IMF, and after a negotiated haircut of €100bn off its bonds, we could see similar events this year.”

“In addition, Greece elected the present radical left government in 2015 and agreed that for a new loan of €87bn, Greece would achieve 3.5 per cent of GDP surplus (through more austerity) with fiscal constraints for a number of years.”

“The IMF and many economists believe this is a hard target to achieve, and since Greece made the surprise payment to pensioners, it has violated the fiscal agreement and reverted to the defiant tactics of the first half of 2015. Therefore we remain cautious investors in this region.”

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