It’s at this time of the year again that investors begin to speculate over which areas of the market they should be buying into.
For example, the liquidity-fuelled Japanese and European markets are being touted as the best areas of the market for investors heading into the New Year – with must global and multi-asset managers overweight the regions within their portfolios.
What isn’t discussed as often though is which areas of the market people are actively avoiding within their portfolios either as a result of high valuations, a poor market backdrop or to hedge against any potential macro headwinds that may hit in the New Year.
As such, FE Trustnet has asked a panel of financial experts which assets, sectors or regions they won’t be buying into in a hurry in 2016 and therefore investors should avoid at all costs.
Bonds
It may be unsurprising that fixed income is at the bottom of many investors’ lists as a hunting ground for opportunities, following high costs, low yields and heightened volatility in the asset class formally referred to as a ‘safe haven’.
Performance of sectors in 2015
Source: FE Analytics
Neil Shillito (pictured), director at SG Wealth Management, says fixed interest will remain unexciting as we head into the New Year. 
“This is not just because of the impact of a 25bps rise (that was already priced in), but the world in 2016 is going to be pretty much the world we have experienced in the last few years, so why fixed interest should get exciting is anyone's guess,” he said.
Instead, he believes that equities remain a better bet despite their volatility, as he says that good managers will generally deliver. He also believes that property will continue to be a good bond proxy, so long as it is held for the long term and as part of a diversified portfolio.
Ben Willis, head of research at Whitechurch Securities, opted for bonds as an area not to invest in last year, and his sentiment towards the asset class remains largely unchanged.
He says that investors should be aware of the fact that the Fed’s recent rate rise signals the slow beginnings of “normalisation” after seven years of emergency interest rates, and that there is currently almost zero inflation in the major developed economies.
“Two key factors that affect bonds are interest rates and inflation – at present we have near zero in both and this has maintained the bull-run in bonds which has been with us for over seven years,” he explained.
“However, I’m not saying that rate rises by the Fed will cause a bond sell-off, but it will be the potential trigger for yields to widen in the coming years if ‘normalisation’ in the US, and UK, continues. As mentioned, we don’t expect the bond bubble to burst in the foreseeable future as we still generally expect rates to remain relatively low, it is just that bond returns will be uninspiring and not worth the risks attached.”
Despite this though, Willis still allocates to bonds for portfolio diversification, and prefers corporate credit over government bonds due to their higher yields and the fact they are less sensitive to rate movements.
Meera Hearnden, senior investment manager at Parmenion, says that the area within fixed income to watch out for is high yield, which paradoxically many investors have been buying into in an attempt to cushion the blow of rate rises.
She says that rising default rates in high yield are her biggest concern at present, and adds that the US high yield energy sector has been the worst affected and that the market has suffered from contagion so far this year.
“With the interest rate cycle in the US on an upward trend, this is likely to put more pressure on high yield bonds as the dollar could strengthen further, which could hit corporate balance sheets harder,” she warned.
“So, while yields in the high yield sector may already look attractive, there could be some further weakness in the first half of 2016 before attractive buying opportunities present themselves.”
Commodities and emerging markets
Commodities are another area of the market that investors could have predicted would end up on our list, following over-supply globally and the subsequent plummet in prices over the past year.
Performance of index in 2015
Source: FE Analytics
Adrian Lowcock, head of investing at AXA Wealth, says that investors shouldn’t view the recent falls as a buying opportunity, though. In fact, he expects further pain for the likes of oil and mining companies.
He says the effects of falling commodity and oil prices will continue to reverberate throughout 2016 and impact on company profits for a long time, and warns there could be further shocks as the slowdown across emerging markets continues to impact prices.
“I would also expect the oil price to remain low as OPEC maintain production and keep the pressure up on other producers,” he said.
“If commodity prices do stabilise then material companies might look attractive, however we would need to see clear signs of that before investing. Sentiment remains negative for the time being.”
Dan Boardman-Weston, head of portfolio management at BRI Wealth Management, also expects commodities to retain their negative impact, particularly on commodity-exporting nations due to weak iron ore and low oil prices, which he says will continue to impact growth for certain major emerging markets in the New Year.
“Not only this, but weakening currencies, high levels of dollar-denominated debt, a slowing Chinese economy and political uncertainty in Latin America and other emerging economies will also affect emerging markets,” he said.
“This last point has been evident in the last few days, with South Africa having three separate finance ministers within the course of one week and investors taking flight as a result. In sterling terms, emerging markets are down about 14 per cent this year and although the short-to-medium term fundamentals look weak, there may be some value hunting that goes which may cause a temporary relief rally.”
Retail and housebuilders
Housebuilders have been an immensely popular area of the market over recent years as a result of an improving economic backdrop and strong demand for new homes across the country.
However, Neil Jones, investment manager at Hargreave Hale, says that the sector could suffer a swing in sentiment as interest rates rise in the US, although he adds that he doesn’t expect the rise to be too dramatic.
“Share prices have had a great few years and whilst valuations don’t look expensive, I do expect some profit taking,” he said. “Profits are likely to be maintained for the next couple of years, but my fear in this area is that we see some sector rotation at these levels.”
Another area of the market that has been popular among investors is the consumer sector, due to a combination of low interest rates and falling oil and commodity prices leaving many with money to spare.
Performance of indices in 2015
Source: FE Analytics
“I feel the UK consumer remains quite stretched and has got too used to a period of low interest rates,” Jones warned. “As a result, we could see competitiveness rife, with heavy discounting in place to encourage a flagging consumer market. This is likely to hurt profit margins, even if revenues can be maintained.”
