2018: investing in companies that can run up the down escalator

With 2017 benefiting many investors, Darius McDermott, managing director of Chelsea Financial Services, considers what 2018 may bring.

2018: investing in companies that can run up the down escalator

With 2018 just round the corner and most equity markets on high single or double-digit gains, the likelihood is that most bourses will have rewarded UK investors by the end of the year. Equities aren’t the only asset class that have been kind to us in 2017 either, with UK, European and emerging market bonds achieving positive results in sterling terms. But will next year be as rewarding?

I believe there are a number of headwinds on the horizon. Years of central banks printing money and buying bonds – or quantitative easing (QE) – have inflated prices across several asset classes. As central banks start to reverse that trend, it will be prudent to keep an eye on potential interest rate increases and how this could impact your portfolio. For UK investors in particular, there is also Brexit-related uncertainty to contend with, as well as low productivity and high levels of inflation.

Asset class

These niggles should not deter anyone from putting their money to work – the final throes of a bull market often go on longer than expected and, let’s face it, there is little point in keeping money in cash these days. But these niggles should at least cause investors to stop and think and be selective when it comes to which asset class or sector to buy in to.

When it comes to bonds there are a still a few options in play. Short duration bond funds – or funds that hold bonds with a short time to maturity – could present themselves as a good option to minimise the impact of interest rate hikes. An example of one such fund is AXA Sterling Credit Short Duration Bond fund, which is headed up by Nicolas Trindade.

Alternatively, emerging market debt – which is at the opposite end of the risk scale – is more attractively priced and offers more income than its developed market counterparts. Investors may wish to consider M&G Emerging Market Bond which, over five years, has comfortably doubled the return of its average peer with gains of 51.44 per cent and yields 4.9%*. Aberdeen Emerging Market Bond is another option.

Equity exposure

For those looking to increase their equity exposure, the more attractively-valued market areas where the economic fundamentals are improving, are Europe, Japan and emerging markets. Funds we like that focus on these areas include Baillie Gifford Japanese, Charlemagne Magna Emerging Markets Dividend and Jupiter European Opportunities Trust.

A trust that encapsulates all these ideas is Murry International. It’s a global equity income fund that can also invest in bonds. It currently has a 9% weighting to Latin American and emerging market bonds and 18% in their equities. The manager’s weighting to the US is very low at just 14%.

Another of my favourite global equity managers is James Thomson, who runs Rathbone Global Opportunities. While he acknowledges markets are looking expensive, he says he’s never been as fully invested as he is today – he is simply focusing on companies that can “run up the down escalator”, as he puts it.

Portfolio position

Another way to position portfolios against toppy market valuations is to adopt more of a value tilt. In the UK, for instance, Labour leader Jeremy Corbyn’s recent threat to banks is likely to have further bruised investor sentiment towards the sector.

But of course, the UK economy would be rendered defunct without banks and, as such, it could be that sentiment has faltered more than necessary. Alex Wright, who manages the Elite Rated Fidelity Special Values Investment Trust, said the outlook for the UK banking sector looks promising as we head into 2018.

“Intense regulatory scrutiny means balance sheets are now generally much stronger than they have been for some time and the loans that are being written would seem to be much less risky than those made pre-2007,” he said. “Regulators are also now becoming more willing for banks to make sizeable distributions to shareholders in the form of dividends and share buybacks.”

*Source: FE Analytics, total returns in sterling to 5 December 2017.

 

Past performance is not a reliable guide to future returns and tax rules can change over time. Darius’s views are his own and do not constitute financial advice. Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. 

 

 

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