In 2016, investors experienced an Asian crisis, Brexit, Donald Trump and an Italian referendum. Yet despite it all, markets continue to rally. Investors are now asking which asset classes will generate positive returns in 2017 and beyond. Investment managers at Calamatta Cuschieri Kristian Camenzuli (KC) and Jordan Portelli (JP) answer investors’ typical questions on the equity market and the fixed income market respectively.
Equities
Q: Do you expect 2017 to be a good year for equities?
KC: I expect global equities to deliver higher returns in 2017 driven by stronger economic growth, higher inflation and more active shareholder policies (in the form of merger and acquisitions and share buybacks). Central banks’ pro-growth policies will be the main drivers of an improvement in the global economic climate.
Russia could be a game changer in 2017. President Donald Trump has repeatedly stated his willingness to get along with Russia. If he can normalise relations with Russia, it would have a positive economic impact on Europe since it was the region most impacted by the sanctions against Russia, which was the EU’s third largest trading partner before the Ukraine crisis took off.
But other events in 2017, such as elections in Europe, Brexit and US protectionism, all pose a threat to what could be a good year for equities.
So in order to be a successful, an investor needs to pick his/her stocks wisely. Not every sector will outperform the market. Understanding which sectors will drive returns is key to generate additional returns in a portfolio.
Q: Which sectors do you expect will outperform the market and why?
KC: Appetite for risk has increased and we are seeing a rotation out of safe havens and into cyclicals stocks. These sectors should outperform the market in 2017:
Automobiles and parts: We have seen constant positive data from this industry and our positive view on global growth and consumer discretionary stocks puts this sector in the spotlight. The following are exchange-traded funds covering this sector: iShares STOXX Europe 600 Automobiles & Parts (SXAPEX in EUR) and First Trust NASDAQ Global Auto Index Fund (CARZ in USD).
Oil and gas: With the agreement by Opec and non-Opec countries to cut supply as well as an improved global economic scenario, we expect companies in this industry to outperform. The following are exchange-traded funds covering this sector: iShares STOXX Europe 600 Oil & Gas (SXEPEX in EUR) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP in USD).
Financials: US financials should benefit from increased interest rates, lower taxes, expansionary fiscal policy and deregulation. Likewise, European banks should also benefit from an improvement in economic conditions and potentially higher rates, also in Europe, earlier than expected. The following are exchange-traded funds covering this sector: Lyxor UCITS ETF STOXX Europe 600 Banks (BNK in EUR) and SPDR S&P U.S. Financials Select Sector UCITS ETF (SXLF in USD).
Construction and materials: Construction in the US should benefit from fiscal stimulus whereas construction in Europe should benefit in line with the surge in euro-area economic confidence which has reached the highest level since 2011. The following are exchange-traded funds covering this sector: iShares STOXX Europe 600 Construction & Materials (SXOPEX in EUR) and PowerShares Dynamic Building & Construction (PKB in USD).
Retail: As consumers are better off from positive economic conditions, retailers benefit as consumption increases. The following are exchange-traded funds covering this sector: iShares STOXX Europe 600 Retail UCITS ETF (SXRPEX in EUR) and SPDR S&P Retail ETF (XRT in USD).
Q: Which stocks do you recommend this year?
KC: In my opinion, the great rotation out of safe havens and into equities has just started, and if long-term technicals are anything to go by, the outlook for equities is looking very promising in the coming years.
The following are the stocks that I expect will generate higher returns than the market in 2017:
Euro: Valeo (FR), Total (FP), LVMH Moet Hennessy Louis Vuitton (MC), BNP, ASML.
USD: Home Depot (HD), Mastercard (MA), Starbucks (SBUX), Foot Locker (FL), Goodyear (GT).
GBP: Diageo (DGE), BP, Royal Dutch Shell (RDSA), AstraZenica (AZN), BAE Systems (BA).
Fixed income
Q: What is your outlook for the bond market in 2017?
JP: Over the past months, market participants have questioned whether the 30-year-old bull bond market is approaching its end. Over the years this asset class has generated generous returns which were also stimulated by the huge wave of monetary stimulus. However, in 2017 I do not expect any huge surprises on the upside in terms of price returns, mainly in Europe. The returns will primarily be generated from interest payments.
Returns will primarily be from interest payments
The slightly bearish outlook is a result of increased expectations in Europe that the ECB will reduce its stimulus going forward and we should experience further widening in spreads. That said, in Europe, credit fundamentals remain supportive and default rates should remain at low levels of 2.5 per cent for high-yield bonds, providing investors with decent returns.
Q: Over the past years, government bonds have generated strong returns. Will this be the case in 2017?
JP: Locally, investors have managed to lock easy returns over the years in short periods of time. By now, investors should have realised that the easy returns being generated in the past are not sustainable. In fact, over the past months local government bonds, mainly longer maturity bonds, have registered notable price declines.
Investors are now understanding better how the local government bond pricing works and the increase in risk associated with bonds with longer maturity. In fact, we have seen downward pressure on prices over the past couple of months.
In terms of numbers, since September 2016, on average, long-dated foreign sovereign bonds shaved-off just below 15 per cent from their value on increased market expectations that the ECB will start tightening its policies.
Going forward, government bonds should continue to depreciate in value, with the more sensitive being long-dated issues. Over the past months, macro-economic data in Europe continued its sustaining path, with few exceptions. This is surely another motive for the ECB to tweak its policies, which in return will continue to pressure primarily bond prices.
Q: Can investors still generate attractive returns from the bond market?
JP: Theoretically, bond prices, among others, react negatively to increased market expectations of reduced monetary stimulus and/or rate hikes. This is the main reason why over the past months we saw huge movements in government bond prices and investment-grade corporate bonds. However, being very selective within the fixed-income asset class per se will be crucial going forward for investors which are dependent on income.
In general, the high-yield market is much more resilient in terms of price movements, due to the fact that the high coupon mitigates the long maturity. In fact, over the past months we’ve continued to see good returns from the high-yield market.
I believe fixed-income investors can still generate returns if they are selective in their asset allocation and find the right niche opportunities. The key for sustainable total returns is managing well one’s portfolio’s duration, which theoretically speaking, is the sensitivity of bond prices to increases in interest rates. Thus, holding a diversified portfolio with strong underlying credit stories and a low duration should fulfil investors’ expectations.
The information, views and opinions provided in this article are provided solely for educational and informational purposes and should not be construed as investment advice, or advice concerning particular investments or investment decisions, or tax or legal advice.