A rise in bond yields, trade protectionism and political antagonism will remain the three biggest headwinds to equity portfolios throughout the course of next year, according to Jason Pidcock (pictured). 
However, the manager of the Jupiter Asian Income fund says Asia is a “bastion of calm” compared to the West, where these trends are already influencing market movements.
“I have a particularly positive outlook on the more developed Asian markets, where recent meetings with chief executives and chief financial officers of the companies in which I invest have reassured me that earnings growth will continue on a steady trajectory going into the new year,” he said.
“This is, in large part, thanks to them being situated in countries with political stability and strong, growing economies.”
In the below article, Pidcock explains the three major risks he believes are facing equity investors in on a global basis.
Rising bond yields
Bond yields plummeted during the first half of the year as investors flocked to fixed income in a bid for safety and regular income pay-outs.
As to be expected, this mass market move created volatility in the asset class and, given that yields fell so sharply, investors decided to move into dividend-paying stalwart mega-caps or ‘bond proxies’ instead.
Yields have really begun to rise sharply over the last three months in particular though, with 10-year gilt yields up by 72.01 per cent over this time frame, according to data from FE Analytics.
Performance of indices over 3months
Source: FE Analytics
This has been attributed to inflation concerns, given that fiscal policy is widely expected by markets.
“While bond yields had been gradually climbing since this summer, like many people I am surprised to see just how much further they have risen on the back of Trump’s US presidential election win. This is the strongest rotation away from global bonds that the world has seen since the Taper Tantrum back in 2013,” Pidcock explained.
“That’s a huge reaction to the election of a man who, put simply, we still do not know very well. Perhaps some of the optimism surrounding growth is naïve.”
“I remain a little sceptical about how much Trump will be able to achieve in his four-year term (if indeed he manages to complete the term at all). Bond yields and commodity prices could fall back again if higher growth rates are not achieved.”
Aside from this, the manager says equity income strategies could be bruised by a market move away from ‘bond proxy’ equities as bond yields rise.
“Markets like Australia – the highest-yielding major equity market in the world – are the first to get cut. Yet, the Australian market is so much more than the simple ‘reach for yield’ play which it has been made out to be,” he continued.
“I believe it holds some of the best, most overlooked investment opportunities in the world which are now at even more attractive valuations.”
Rising Trade Protectionism
The matter of restricting trade between countries first reared its head this year during the run-up to the EU referendum in June, when many industry professionals expressed concern that a ‘leave’ vote would lead to harmful trade barriers.
The issue has also been bought to the fore following Trump’s election, with many investors concerned that a bitter trade war between China and the US could soon erupt.
This is not to mention a potential souring of the relationship between the US and Mexico, which is one of the largest suppliers of imports to the country.
“Since the UK took the decision to leave the European Union, the British government has been touring the world with its ‘Open for Business’ sign (I should add that it’s no surprise an Asian country was picked as the destination of the first trade mission outside the EU). This is a positive development in my view, and counteracts the trade protectionist rhetoric coming out of the US,” Pidcock said.
“Trade protectionism from the West will have an impact on Asia, but the effects are less pronounced than one would imagine: over half of all Asian trade is done within the region, a figure unmatched even by North America itself.”
“That tells you that where Asia was once heavily reliant on Western demand, that story is quickly being overtaken by local consumption.”
The manager says his portfolio is likely to be sheltered from rising trade protectionism given his bias towards local consumption stocks. That said, he believes free market principles are necessary for growth globally.
Rising Political Antagonism
The rise in populist and so-called ‘alt right’ parties has been well-documented over recent months, with the UK’s ‘leave’ majority vote, the election of controversial Republican candidate Trump and Italy’s constitutional referendum all challenging the ideals of mainstream politics.
The rise of anti-establishment parties in the European Union such as Italy’s Five Star Movement, France’s National Front and Austria’s Freedom Party has also sparked concerns that the EU could be reaching breaking point.
These fears have played out in market behaviour throughout the course of the year, with the MSCI Europe ex UK index lagging its peers in 2016 to-date.
Performance of indices in 2016
Source: FE Analytics
“This year, we witnessed strongman politics play out in full swing with the US elections, Brexit, and the number of European elections/referendums that are underway. But it is important to separate the strongman politicians into two categories: those who are antagonistic for the sake of implementing genuine reform in their countries, and those who are antagonistic for the sake of being antagonistic,” Pidcock reasoned.
“I would argue Filipino president Rodrigo Duterte falls into the former camp, and has been a catalyst for real change in his country. In the short time he has been in power, he has garnered unprecedented levels of investment from both China and Russia.”
“While I disagree with his harsh words towards Obama’s administration in the US, he has significantly toned it down when it comes to Trump. Duterte has done so well, in fact, that the Philippines is now on track to being one of the fastest growing economies in the world, a trend which I believe will continue going into 2017.”
Pidcock joined the team at Jupiter last year following his departure from Newton, where he ran an Asian equity income fund for a decade.
Since the manager launched Jupiter Asian Income in March this year, it has returned 23 per cent compared to its sector average’s return of 25.69 per cent and its benchmark’s return of 30.35 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
It has a clean ongoing charges figure of 0.98 per cent and yields 4 per cent.