A monthly market outlook from Sanlam Private Wealth
A brave new world, or
misplaced confidence?
February 2017
It might be February, but the political and economic landscape is looking anything but
dreary. President Trump has his feet under the Oval Office table, and Theresa May has come
out fighting on Brexit with a confident, and arguably threatening, stance as a precursor to
the UK’s exit negotiations from the EU and the single market.
So is it time to look forward to a brave new world, where we can get excited about economic growth prospects,
and lay the ghosts of our austerity past to rest? Or is this positive momentum going to prove to be misplaced
confidence? Here is our view on the outlook for some of the key asset classes:
Equities
Equity markets have reacted positively to the pro-business
policies emanating from the US, and the associated global
optimism. There was a palpable change in sentiment by the end
of 2016, with real signs of economic recovery and reflation. This
positive momentum has been carried into 2017, and prices
continue to reflect that.
However, when you look at valuations, equities continue to trade
at elevated levels given that they are facing declining labour
productivity and already high profit margins. Global inflation is
also picking up, which puts pressure on labour costs and
profitability. Despite this, earnings expectations have increased
since Trump was elected as US president, and markets will not
react well if those earnings prove to disappoint.
Markets also like consistent messages. With an unpredictable
US president, and uncertainty around Brexit negotiations –
especially leading up to the parliamentary vote on new trade
deals – we can expect a degree of nervousness for at least the
next 2 to 3 years.
A word from our
Chief Investment
Officer
“
“
We expect 2017 to bring similar
levels of uncertainty to last year. There remains some doubt around the recovery in company profits and, with so many unknowns dragging on businesses, there’s a real possibility
that markets will respond with a sell-off
if returns prove disappointing.
“
/
Bonds
Thanks to renewed optimism, given the expectations for higher
inflation and rising interest rates in the US, global bond yields
have been rising. While this will undoubtedly bring the
opportunity to invest at more attractive yields, especially within
the corporate bond sector, we remain cautious that government
bonds are still vulnerable to yields moving even higher.
Philip Smeaton
Chief Investment Officer
[email protected]
Property
Property prices are also vulnerable to higher interest rates, but we think that much of this is reflected in the valuation
of the listed property shares. Property portfolios are generally holding good-quality stock, with much better loan-tovalues and capital structures than they have in decades past.
In summary, the economic outlook is improving, and there are reasons to feel optimistic. But given
elevated valuations, we are still facing a low-return environment and there is very little to choose
between asset classes.
The ‘quality’ perspective
When it comes to building our clients’ portfolios, we favour a bias towards ‘quality’ stocks, investing in well-managed
companies with strong balance sheets and an attractive competitive advantage. This is a long-term strategy,
underpinned by the theory that history will continue to repeat itself. These stocks should offer investors superior
shareholder returns, thanks to higher returns on capital, and the ability to distribute excess cash to shareholders rather
than constantly having to re-invest in their own business.
The chart below shows the performance of quality stocks versus ‘normal’ stocks over the last 30 years. Where the
graph shows an upward trend, it means that quality stocks outperformed normal, and vice versa.
“
By investing in sustainable and
durable businesses that focus on
disciplined capital allocation, and have a track record of acting consistently in shareholder’s best interests, we
believe we can provide good long-term
returns in an otherwise unpredictable
environment.
“
There are two important points to make here:
•
Although quality stocks underperformed the index by 5% last
year, we are proud that our stock-picking allowed our Global
High Quality Fund to marginally outperform the index after
fees, maintaining its exceptional track record and proving that
solid research, and active management can pay dividends.
•
While investing in quality stocks is widely considered a ‘steadyas-you-go’ strategy, the graph proves that this approach does
outperform the broader market over the longer term.
Matthew Brittain
Investment Analyst
[email protected]
Finding solace in structured products
Recently we’ve been holding an overweight cash position to protect against downside risk, ensuring we are in a liquid
position to take advantage of opportunities as they arise. We still hold this view, but are looking at ways of re-investing
some of this cash to achieve longer-term returns, while also offering shelter from any market falls.
We’re currently researching structured products as they offer an alternative growth strategy for client portfolios
throughout this period of uncertainty. It can offer clients the opportunity to gain leveraged participation in say, the first
30% of an index’s return, while also offering same downside protection. In other words, you trade some of the gains
if markets were to suddenly surprise to the upside, in exchange for protection in the event that markets fall. It’s
important to point out that structured products do not offer a guaranteed income or return, and you could still lose
money. The structure aims to minimise the risk of that happening.
2016 GLOBAL ECONOMIC GROWTH IN NUMBERS
$
£
¥
€
1.9%
2.2%
6.8%
1.7%
Source: Bloomberg
Our view on individual asset class performance
Here is a high-level view of our outlook and standing for each asset class. Please bear in mind that this is an overview, and
we continue to look for tactical opportunities within each asset class.
ASSET CLASS
VIEW
COMMENTS
Marginally
underweight
Our principal concern for equities as an asset class remains the risk that
companies fail to deliver the earnings growth expected by the market. The
strong dollar and higher interest rates are headwinds for companies to
overcome, although better earnings from companies in the financial, energy
and basic material sectors should offset this. Longer-term forecasts remain
optimistic and are likely to be revised downward should global growth
remain at the current soft levels.
Underweight
Recently, higher inflation expectations and a hawkish shift in central bank
rhetoric have resulted in a spike in government bond yields. Despite this
move, we remain of the view that bonds are expensive and are comfortable
with the underweight position, bearing in mind that our cash holding serves
one of the purposes of bonds – protection during a ‘risk off’ event. Within
fixed income, we have significant exposure to shorter duration investment
grade credit, which offers a much better long-term expected return profile.
Neutral
Property continues to appear fully priced when viewed in terms of its own
history. That said, long-term leases provide clear earnings visibility, and the
sector still enjoys solid fundamentals and consistent distribution growth that
has proven itself resilient. The ‘lower for longer’ view we have for interest
rates also supports the argument for REITs and property as an asset class.
COMMODITIES
Neutral
Commodity prices have recovered to a point where year-on-year numbers
are generally positive, which will bring higher inflation. In addition to
improving the inflation outlook for developed markets, higher commodity
prices stabilise the outlook for emerging market economies. The continuation
of this improving trend depends largely on the supply side reaction to
slightly higher prices and the global demand profile, which was surprisingly
strong in 2016 thanks to China.
ALTERNATIVES
Overweight
In this low-return world, these vehicles should provide a steady return that
is uncorrelated to the market. They are also faced with a challenging
investment opportunity set, so we can’t expect them to work miracles.
Overweight
Sterling is likely to remain range bound and volatile in the near term, while
gold and the yen provide something of a safer haven. We retain our
overweight position in cash as it means we have the flexibility to make the
most of investment opportunities as they arise.
EQUITIES
FIXED INCOME
PROPERTY
CASH
Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd which is authorised
and regulated by the Financial Conduct Authority. Registered in England and Wales 2041819.
Registered office: 16 South Park, Sevenoaks, Kent TN13 1AN.
contact with Sanlam UK
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This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt
any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but
are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice.
Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance
is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise