Connecting: 216.73.216.72
Forwarded: 216.73.216.72, 104.23.197.12:19708
Where NOT to invest in 2018 | Trustnet Skip to the content

Where NOT to invest in 2018

03 January 2018

Market commentators name the sectors they will be steering away from in what looks set to be an unclear 2018.

By Jonathan Jones,

Reporter, FE Trustnet

A foggy outlook for markets in 2018 has left industry experts polled by FE Trustnet wary of a number of different asset classes including the UK, emerging market debt and (once again) US equities. 

Last year was a difficult market to call as the return of growth investing dominated equities while bonds held up surprisingly well despite a ramp up in the interest rate hiking cycle by the Federal Reserve in the US.

Additionally, the Bank of England also made an interest rate rise while rhetoric of less monetary stimulus from the European Central Bank could also have hit bonds.

While the overall Bloomberg Barclays Global Aggregates index is down 1.9 per cent for 2017, on average pockets such as US treasuries and emerging market debt has had a stronger year than expected.

Turning to equities, geopolitical risks have largely been shrugged off by the market with the MSCI AC World up 13.23 per cent over the year, led by emerging markets and Japanese stocks.

Performance of indices in 2017

 

Source: FE Analytics

While parts of both the bond and equity markets surprised to the upside last year, many remain concerned that a market correction is overdue and argue that there are areas investors should look to avoid during 2018.

Starting with equities, Liontrust Asset Management head of multi-asset John Husselbee said the US is looking particularly expensive and investors may wish to take profits – though he would not sell out entirely.

Last year the main area of focus for the where not to invest article was the US, which many believed was overvalued but while the S&P 500 underperformed the broader MSCI AC World for the first year since 2012, it still returned 10.62 per cent in sterling terms.

“What we are always looking to do is to follow the simple rules of investment, which is buy low and sell high, and look to accumulate cheap assets and avoid expensive assets,” Husselbee said.


“In the equities world US equities of the large-cap variety are expensive. Last year US equities didn’t move in terms of their multiple, they moved in terms of their earnings which were in turn moved on the basis of not only growth holding up in the US but of global synchronised growth as well.”

Performance of indices in 2017

 

Source: FE Analytics

However, there are two reasons why the US market could underperform the wider market again in 2018, starting with the US dollar.

“The dollar certainly has helped other economies this year. A weaker dollar in 2017 has helped Asia and emerging markets and all of the exporters around the world,” Husselbee said.

In particular, he said investors should avoid the growth areas of the market, which have widened to ever higher levels.

“The gap has spread between value and growth now and if you look over the last 10 years there has never been a wider point,” he said.

“While value stocks rallied strongly in the back half of 2016 – and there was an expectation that the gap would narrow – it simply hasn’t happened and what it has done is gone further.”

Away from the US, Andy Merricks, head of investments at Skerritts Wealth Management, said he would avoid the UK with Brexit uncertainty making the outlook difficult to formulate.

“A lot of people seem to invest in the UK because we happen to live here but I don’t really get that argument,” he said.

“We pretty much came out of the UK once the referendum result had been called because no one knows what Brexit means – politicians don’t, economists don’t know one does.”

Merricks said that investing in the UK in the current climate amounts to more guesswork than analysis with investors hoping for a positive outcome rather than making rational decisions.

“Unless you have to invest in it I don’t know why you would invest when there are opportunities elsewhere,” he added.


“When we get a bit of clarity on what Brexit actually means there will be huge opportunism within the UK market and we will be more than happy to pile in when we know who the winners and losers will be.

“But at the moment the winners and losers tend to fluctuate on a monthly basis – sterling, small-caps, large-caps – they’re all over the place so I don’t see a benefit of risking a UK investment.”

Turning to bonds, while many are underweight the asset class next year there are pockets that now represent worse value than others.

Thesis Asset Management portfolio manager Steven Richards said he is avoiding emerging market debt – and in particular passive instruments.

The asset class has done particularly well over the last year, with the JP Morgan GB-EM Global Diversified Composite index returning 5.24 per cent to investors, but Richards said this should be a cause for concern.

Performance of sector in 2017

 

Source: FE Analytics

“Generally, emerging markets have had a better time in 2017 but with this has followed a flow of money into passive products and because trackers are forced to buy all the underlying bonds in the indices that they represent, certain emerging markets bonds are seeing a consistent flow of money going into them,” Richards said.

“Firstly we have got the issue that if we saw the reversal of money you would begin to see the reverse happen and emerging market bonds fall in value.”

However, he added that fundamentally it does not make sense to buy passive instruments which have to own assets that many would prefer to avoid.

He said: “If you look at some of the holdings in the index the largest holding is from the Russian Federation and is a 13-14 year bond which at the moment is on a gross redemption yield of 2.7 per cent.


“If you compared that to a 10-year US treasury which is on a 2.3 per cent gross redemption yield then you are only being rewarded 40 basis points more for holding Russian debt versus US government debt when historically the spread has been towards the region of 300 basis points.” 

Richards added that with the strong run of the asset class over the last year compressing yields and forcing prices higher, investors may wish to think about taking any profits and reallocating to other areas.

Meanwhile, Richard Philbin, chief investment officer at Wellian Investment Solutions, said he would avoid European high yield debt for a similar reason. 

“Lots of areas are looking a little stretched, but if I were to go with one, I think I’d have to go with European high yield debt,” he said.

“The spreads are almost as tight as investment grade, but the quality is not as good and deteriorating. Combined with a duration that has got longer over the past few years and the risk-reward profile just doesn’t look appealing to us.”

However, playing devil’s advocate, Hargreaves Lansdown head of research Mark Dampier said while investors may wish to take an underweight position to these areas they should not shun them entirely. 

“The truth of the matter is that when it comes to investments I don’t look at it on a year’s basis anyway and I tend to have a foot in most camps,” he said.

“What most people will probably come out with at the end of the year will be how expensive the US is on CAPE [cyclically-adjusted price-to-earnings multiples] and all these other things which historically is absolutely true but they have been saying that for the last six years.”

Dampier (pictured) added that if investors are pessimistic over the prospects of the US and think there is the potential for a huge correction then they might as well not buy anything.

“If the Americans have a 20 per cent correction you can’t tell me that Asia, Europe and the UK won’t come down as well. They might come down to a lesser degree or more – I don’t know – but usually if the US has a fall Europe comes out even worse and everyone is buying Europe like there is no tomorrow.

“We are overdue a correction. Normally you get a 5-10 per cent correction in markets every year and I don’t think we’ve had one for something like two years but trying to forecast that I have no view on it.”

As such, Dampier said investors looking for the longer term should look to diversify, having a bit of exposure to lots of asset classes in case a correction does occur.

This view is also backed up by Liontrust’s Husselbee who noted: “We will not shun anything entirely and therefore will not be zero weighted. We believe in diversification and that belief comes on the basis that when one asset class is going up another is going down.”

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.