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Finding opportunity in 2017

Published: 6 January 2017

If 2016 was the year of political surprises and change, 2017 is shaping up to be the year where the effects of these become clear to investors.

We asked a number of investment managers to share their thoughts on what lies in store in 2017 and what this might mean in terms of risk and opportunity for investors. And while there wasn’t always consensus, there were a number of recurring themes:

A background of turbulence

The most common theme was a recognition that the political turbulence of the past year will have a lasting effect.

There are also fresh political risks ahead for investors to consider, said Paul Diggle, senior economist, investment solutions at Aberdeen Asset Management. “If 2017 brings further electoral success for populist, anti-establishment politicians, it could lead to rising protectionism, higher trade tariffs, crumbling free trade areas, reduced support for multilateral institutions, and less economic migration. These developments could all knock the global economy off the rails.”

Harry Nimmo, manager of the Standard Life Investments UK Smaller Companies Trust, said: “We see a lot of uncertainty out there. There’s a lot of elections in Europe, tortuous negotiations and issues over the Euro, so there’s certainly some concern looking at 2017.”

Nick Greenwood, manager of the Miton Global Opportunities Trust, believes that the coming year “is going to be quite turbulent”, pointing to US interest rate rises where “the adjustment could be quite painful”.


A move towards looser fiscal policy

The various events that dominated headlines in 2016, most notably the EU referendum and the US election, will help shape economic policy for some time to come, according to Andrew Bell, chief executive of the Witan Investment Trust. He noted that the previous policy response to low growth - implementing even lower interest rates - appears to have “run out of road and self-belief”, with a shift towards looser fiscal policy.

This would have clear implications for the various asset classes, both positive and negative. “The willingness of governments to use low borrowing costs to fund increased spending commitments (or tax cuts) tilts the risks in favour of higher yields,” said Bell.

“A greater focus on spending your way to growth means that bonds are vulnerable to greater supply and increased inflation risk.”

Sue Noffke, manager of the Schroder Income Growth Trust, was more circumspect about the outlook for both equities and bonds. “Generally equities are well placed for a steepening of the yield curve and a gradual rise in bond yields. However, the risk is that you have a bond market which sees too steep a rise in too short a period of time, which would be bad news for equities, as market valuation levels for bonds and equities would fall.”


The impact of rising inflation

Rising inflation is widely expected to be a dominant theme in 2017. An oil price uptick and the weak pound contributed to rising prices in the UK in late 2016 and, while those factors may be temporary, Donald Trump’s plans for stimulus including massive infrastructure investment could have a more lasting inflationary effect on inflation in the US and elsewhere.

“Regardless of where inflation is, it’s rising and that’s going to be bad for bonds. Having said that, we’re probably at a stage where equities can continue to do well,” said Peter Elston, manager of the Seneca Global Income & Growth Trust. “They tend to start performing badly when monetary policy has been tightened for some time and when it’s started to have an impact on growth, but we’re a long way from that.”

Inflationary pressures are likely to prove more favourable for some companies than for others. As rising prices put pressure on consumers’ disposable income the focus will be on identifying companies that can continue to grow their earnings, according to Noffke. A company’s pricing power and its ability to pass through inflationary input costs to consumers, will to a large extent determine its ability to keep earnings growing.”

Elston made a similar observation. The “unconventional” monetary policy of recent years has created an environment in which even badly managed companies can do well, said Elston. But that may now change, he predicted. “If we’re moving more into an environment where monetary policy is finally being normalised, that should mean the better managed companies should start to perform better than their counterparts that aren’t so well managed. It should mean that value investing, which has been quite hard in recent years, should make a bit of a comeback.”


Potentially good news for commodities and emerging markets

Inflation could also benefit ‘real assets’ including commodities, according to Nitesh Shah, of ETF Securities. “We expect the defensive metals – gold and silver – to gain, largely on the back of inflation surprises. We believe inflation is likely to run ahead of rate increases in the major economies and that’s traditionally supportive of gold and silver.”

Donald Trump’s victory in the US election sent ripples of alarm through emerging markets, given his recurring theme of protectionism. But the bigger picture for emerging markets offers investors more cause for optimism, said Joanne Irvine, head of emerging market equities (ex-Asia) at Aberdeen Asset Management.

“Economic and monetary policies are very orthodox and this has been paying off. Inflation is largely under control or falling. Currency weakness may slow but should not prevent central banks from cutting interest rates to support growth. At the corporate level, there are signs the earnings cycle is turning for the better,” said Irvine. “These regions will grow faster than the developed world for years to come. Unlike the financial markets or even changes in political climate, this is structural, not cyclical.”


Opportunities are out there

Overall, it’s clear that the economic climate presents opportunities in 2017. While there are plenty of “hippos in the river”, said Bell, there is “hope to be had from the shift towards more active fiscal policy easing and a gradual normalisation of interest rates”. “Overall equity markets are priced to give patient investors the benefits of global growth but with no windfalls from valuations,” he added. As the past year has emphatically reminded us, all we can really predict with any certainty is that uncertainty lies ahead. So it’s as important as ever to keep an eye on the big picture, remember that short-term volatility is typically smoothed out over the long run and make sure your portfolio is well diversified.

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Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Laws and tax rules may change in the future without notice. The information here is our understanding in January 2017. This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

Watch manager videos

We videoed four investment managers for a more in-depth look at their views. See what they have to say here.



Name: Harry Nimmo
Title: Fund Manager
Trust: Standard Life UK Smaller Companies Trust

Name: Peter Elston
Title: Fund Manager
Trust: Seneca Global Income & Growth Trust

Name: Nick Greenwood
Title: Fund Manager
Trust: Miton Global Opportunities

Name: Nitesh Shah
Title: Commodities Strategist
Trust: ETF Securities

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