Crystal ball gazing: where to invest in 2016
For the purposes of this feature we have decided to stick to the crystal ball gazing of the wealth, and multi asset and multi managers in the attempt to pull together some noteworthy themes to look out for this year.
For example will equities still be the asset of choice? Where globally are managers looking for opportunities and what are the major risks, both macroeconomic and political, to look for?
In terms of asset classes, John Chatfeild-Roberts, head of strategy on the Jupiter independent funds team, says while the year ahead looks promising for global growth, the problem of rebalancing the Chinese economy and handling the growing divergence being seen in interest rate policy across the globe “could create choppy waters”.
“Against this background, we believe equities remain the asset class of choice, with selective areas of the bond market offering positive returns,” he says.
However Chelsea Financial Services’ managing director Darius McDermott notes that when it comes to hunting for equities, bar one or two emerging markets, “nothing is cheap any more”.
As a result he favours Europe and Japan.
He says: “Both economies are still in the easing phase and, if we learned anything in the past few years, it’s that QE is positive for stocks. Funds I like include BlackRock Continental European, Threadneedle European Select, Neptune Japan Opportunities and Schroder Tokyo.”
Michael Stanes, investment director at Heartwood Investment Management, says in a low growth/low interest rate environment, he continues to believe that equities offer the best potential risk-adjusted returns versus other asset classes over the longer term. In 2016 he says the focus will likely be about re-orientating its equity exposure across style, sector and market capitalisation, and ultimately towards the emerging markets, while at the same time being sensitive to the increased volatility of financial assets in this low growth environment.
Indeed increased volatility is a theme identified by many as a theme that will play out this year. In addition to the likelihood for increased interest rates, there is a US election next year, while fears of a UK exit from the EU – the Brexit – will persist.
“More broadly, the key question for investors in 2016 will be to determine when to begin the rotation from developed equity markets into emerging market equities,” says Stanes.
“Within our own portfolios we have had limited exposure to EMs, but over the longer term we will be looking for opportunities to allocate more to these markets. Ultimately, the decision to rotate will depend on when the growth picture starts to stabilise in EM, which we believe represents a story for the second half of 2016 and into 2017.”
Rathbones’ head of multi asset David Coombs, disagrees and says developed markets are the place to be, while he additionally forecasts that political risk will be the biggest threat to markets in 2016.
He says: “Markets are entering a year of great macroeconomic change that will buffett assets; however, strong, quality companies that deliver on their promises should fare well. We expect emerging markets will be less ‘safe’, as will illiquid asset classes, particularly high yield bonds.
“Political winds are whipping around the globe too. We think these could have a significant impact on investments, much more than they have had over the past decade.”
In such an environment he says those enterprises that are biased towards the developed world will benefit from the recovery in the US, UK and to a lesser degree, the eurozone. Those overly-reliant on emerging markets, he adds, are in a more “ambiguous position”, as China slows and the US hikes interest rates.
In terms of bonds in 2016, McDermott suspects the only way to make any kind of return is to look for a decent yield to cushion investors from any price falls.
“That means corporate bonds, both investment grade and high yield. Stock selection will be key, however, as most economies are in the stage of the cycle where companies are acting to please shareholders, not creditors,” he says.
Schroders’ head of multi manager Marcus Brookes adds that in a rising rate environment, traditional fixed income tends not to do well.
“Our bias is for history to repeat itself in this respect considering how low current yields are. If we are wrong, and longer-term yields fall when the Fed hikes, it would be suggestive of a policy mis-step, making us more cautious on the economy,” Brookes says.
“Either way, our suspicion is that weaning investors from such loose policy conditions will not be straightforward, so we expect bond markets in 2016 to be fairly turbulent.”
As a final point Brookes adds that 12 months ago the team were rather more optimistic than they are today about the US dollar.
“Once again, history suggests the dollar tends to peak early into a Fed hiking cycle. This is contrary to popular wisdom, which suggests that in spite of a 25% rally in 18 months, the dollar remains a one-way bet. We tend to be wary of one-way bets as invariably they disappoint.”
So what of the prospects away from equities and bonds? Commodities and property had contrasting fortunes in 2015, with property delivering strong returns, while the declining oil price dented sentiment to commodities.
“I’m neutral in commercial property – returns may be more moderate than the past couple of years, with low to mid-single digits,” says McDermott.
“Meanwhile it’s a bit too early for commodities. Global growth has to pick up first and quantitative tightening may well put the breaks on what is already a slow-moving vehicle.”
As a result McDermott says his area of choice for any new investments this year is targeted absolute return funds. “They act as a good diversifier in a wider portfolio and the good ones do what they set out to do,” he says.
“When it comes to long/short equity styles in this sector, my favourites are Henderson UK Absolute Return and Smith & Williamson Enterprise. If you want lower risk, multi-asset, then Church House Tenax Absolute Return Strategies and Premier Defensive Growth are worth a look.”
Coombs adds: “Finally, the momentum behind the passive revolution looks to be coming to an end. That’s not to say they can’t play a tactical part within a portfolio. But over the next couple of years, the most crucial part of an investment strategy will be dodging the losers. Sounds obvious, but trackers don’t have the luxury of making those decisions.”