“The good times for markets are set to roll on (for now)”, says £24 billion wealth manager11 January 2018
Tilney Chief Investment Officer Chris Godding examines the themes likely to dominate investment strategy for the year
Speaking at a briefing in London this week, Chris Godding, chief investment officer of wealth management group Tilney that oversees £24 billion of assets, said that he has a positive outlook for markets in 2018 though he caveated this by warning that he expects greater volatility after a muted 2017. Godding cited the health of the global economy and falling unemployment as reasons for optimism, arguing that tighter liquidity could prevent asset valuations from overheating. However, the evidence to support an outright inflationary view is not overwhelming and any inflation out there is hiding behind the headlines.
Godding commented: “In the US, healthcare and housing costs are two significant core components of inflation and both appear to be trending lower, while broad commodity prices are flat year on year. This suggests that the probability of an inflation shock is quite low despite the underlying strength of the economy. Labour appears to have minimal pricing power and disruptive technology is the new deflationary dynamic. Therefore, although there are some inflation warning flags, it would appear quite likely that interest rates will stay low by historic standards and support equities.
“The strength of the global economy is a double edged sword for investors”, continued Godding. “Higher growth leads to higher corporate earnings and the rise in equities last year was principally driven by strong earnings growth. However, GDP growth can also lead to the real economy absorbing more of the excess liquidity in the system, via higher investment and working capital to effectively crowd out financial money flows.”
He continued: “Lower tax rates to be implemented in the US this year should incentivise investment in capital assets, but generally we expect the crowding out effect to be offset by an increase in stock buybacks. US equity returns this year should broadly reflect the circa 12% earnings growth currently factored in by the markets.
“The UK is forecast to see one of the lowest rates of growth in the G20 next year in GDP (1.6%) and corporate earnings (6.5%) as a result of a tapped out consumer and diminishing investment flows. Capital flows into the UK are under pressure from the threat of a Corbyn government and of course, Brexit. These political concerns introduce the additional prospect of further volatility in the exchange rate. Currency moves are difficult to call but our base case at the moment is that sterling will remain cheap or weaken relative to the Dollar and Euro. We have been reducing exposure to UK assets as we are wary of markets that become highly sensitive to political developments.
“Valuations of financial assets are certainly stretched in many areas but equities continue to be attractive on a relative basis. Fixed income is far from a safe haven although investment grade credit and Emerging Market debt offer reasonable but more volatile returns in a strong global economic environment. In all probability, it is highly unlikely with valuations where they are that the year will pass without renewed volatility to test our fortitude and policy risk from central banks rattling markets is a potential trigger. We would not be overly concerned if this happened as it is relatively normal and would not change our positive view on equities but we are focused on inflation and a strong dollar as more structural concerns.
Godding concluded, “We are implementing these themes into our asset models through various means. Our strategic models have increased exposure to High Yield and EM debt and cut the exposure to UK Gilts materially. Our equity weight is increased modestly and we are raising the weighting to US equities, due to the proposed changes in the tax code in the US and our assessment of total returns. The equity weight in the UK has been reduced because of the political risks and the weak growth picture compared to other major regions. Our previously over-weight Developed Asia has moved back to neutral as valuations have risen, but we remain over-weight Emerging Market and European equities. Our bias in currencies is to favour a higher USD and EUR versus GBP and we continue to expect an improvement in EM FX indices particularly in Latin America.”
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not a guide to future performance. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Current or past yield figures provided should not be considered a reliable indicator of future performance.
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