From BRICS to clicks
The face of BRICS has changed beyond all recognition in the last ten years. And that is not to say emerging market (EM) economies are not commodity driven – some still are.
Emerging markets are not new to technology either – take South Korea and Taiwan and their established electronics industries. But what has changed is the fact that countries like China and India have developed to challenge major US technology firms and change people’s lives beyond recognition. Alibaba, Baidu and Tencent are easily competitors of the FAANGs.
We do not think it will take long for EM investment to be seen as access to a new world not bound by the economic traditions of the West.
Get active in 2018
Active vs passive has been hotly debated in 2017, but what truly wins out? Do you opt for a fund manager who is only as good as his or her crystal ball, and their high management fees? Or a passive fund that is linked to the index? Since 1997, an average of almost 50% of managers investing in UK equities have outperformed the market each year. Over a three-year period, this stat increases to 52%. Over five years, it is 54%.
We think that in 2018, the active fund management industry will prove its worth as high volatility and low correlation, which provide tailwinds for outperformance, start to re-emerge.
Small is beautiful
Investing in smaller companies is a tried and tested approach where it comes to capturing superior returns – since 1985 when records began, the FTSE 250 index has risen at an annualised rate of 11.1% compared with 8.3% for the FTSE 100.
Small companies benefit from the law of large numbers, compared to bigger companies. It is easier to grow a company of £100m by ten than it is to do the same for a company valued at £100bn. Of course there are still risks – they are more likely to go bust, can be illiquid and tend to fall further than the wider market when equities suffer corrections.
We think equity markets will have a good year in 2018 and some exposure to smaller companies makes good sense.
Inflation – keep watch
When the Fed started to push up interest rates this year, everyone waited for inflation to start to spiral. But it did not, or not by much. So what is going to happen in 2018? The hawks believe price pressures will increase and low unemployment figures will feed through to wages, which will in turn pressure inflation. The doves think globalisation and technology have made inflation less sensitive to macro economic issues.
The IMF has indicated that technology is behind the decline in wages as a percentage of costs and the absence of wage inflation means broader price pressures will remain subdued. While there might be a temporary increase in inflationary pressures, we don’t think it will build significantly.
AI and robotics
While AI may not prove to be a passing fad, it is certainly in fashion. But in the same way, you had to be careful which tech vehicle you backed in the days of the dot com boom, AI and robotics companies have to be similarly well vetted.
There are a number of ways investors can capitalise on this theme – at least three actively managed funds have launched in the last 12 months, which have some degree of AI incorporated and there are a number of ETFs available. But like anything else, returns are not guaranteed and investors have to tread carefully. Looking for funds that are managed by experts who have a deep understanding of AI and robotics could be the way forward.
Corbyn in No. 10?
With the Tory party divided over Brexit, Labour has looked stronger than it ever has under Corbyn. He has engineered the support of the disenfranchised youth and won back defectors to UKIP, so seeing “Jezzer” in Number 10 is not beyond the realms of possibility.
But many of the shadow cabinet’s policies are anti-capitalist. Nationalisation of industries, such as energy, railways, water and the Royal Mail is a worry as is the promise of bringing PFI contracts back under state control. Spending on infrastructure is also key, funded by higher taxes on companies and the top 5% of earners.
If Labour were to win what do we think would happen? A run on the pound and Government bond yields would rise. Shares in banks, utilities, housebuilders, transport and the leisure industry would drop and London house prices would come under pressure.
But we think markets would constrain Corbyn’s freedom of action – in the past a number of hard-left governments have changed direction in the face of crumbling currencies and rising bond yields.
Michel Perera, chief investment officer at Canaccord Genuity Wealth Management, shares what he believes will be the investment trends to make headlines in 2018.
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