Winter Investment Outlook

What happened over the quarter?

  • The UK stock market recovered lost ground from the pound strengthening in November as parliamentary approval became part of the Brexit process. The FTSE All Share index made gains over the quarter

  • As banks are likely to benefit under a Trump administration and with US interest rates on the rise, financials strongly outperformed. Materials and industrials rallied given infrastructure spending is a priority for the Trump administration.

  • Oil made gains of over 15% as the OPEC oil production cut agreement was also supported by non-members

  • Most fixed income classes delivered negative returns due to the prospect of higher inflation in 2017 and the US interest rate rise

  • Asian and emerging markets both lost ground after a third quarter rally with the latter suffering from increased sales levels after the US election

  • Gold was the biggest faller over the quarter as a renewed appetite for riskier investments weighed heavily on demand for this safe haven asset

  • The pound rose 2% against the euro after hitting six year lows in October but fell 4.9% versus the US dollar. Over the year, the pound weakened by 13.6% versus the euro and 16.4% against the dollar

  • Approximately two thirds of the funds on the TD Recommended Funds list generated a positive return. US equity funds were the biggest winners. Japanese funds maintained their positive momentum with insurance and energy funds other strong performers

  • Fixed income funds were the biggest losers as higher inflation and further US rate rises will both be bad news for the sector. Only high yield funds emerged relatively unscathed

  • Gold and emerging market funds both performed poorly as reduced demand and higher EM sales volumes negatively impacted returns. Absolute return funds also suffered as they tend to struggle in periods of strong market performance

Read what we expect to happen in 2017

For comparison purposes, over the same period the FTSE All Share returned 3.9%

For comparison purposes, over the same period the FTSE All Share returned 16.8%

For comparison purposes, over the same period the FTSE All Share returned 61.8%

Past performance is not a reliable indicator of future results 
Source: Morningstar Direct as at 31 December 2016.
Indices used: FTSE All World Ex UK TR GBP, FTSE AllSh TR GBP, S&P 500 TR USD, FTSE Europe All Cap Ex UK TR USD, MSCI EM IMI GR USD, Topix TR JPY, MSCI AC Asia Pac Ex JPN GR USD, MSCI Sector indices, Barclays Global Agg Float Adj TR Hdg GBP, FTSE Gilts All Stocks TR GBP, Barclays Gbl Infl Linked UK TR GBP, JBM GBI US Traded TR USD, JPM GBI Global European TR EUR, BofAML Global HY Hdg GBP, FTSE EPRA/NAREIT Developed TR GBP, Oil Price Brent Crude PR, Gold London AM Fixing PR USD.

Outlook on 2017

Overall, the backdrop for 2017 is shaping up into a pro-growth environment, tempered by higher input prices (in the shape of oil), higher inflation and interest rates.

Trump’s election and May’s pro-growth stance have improved our growth outlook. In both countries there will be more emphasis on government fiscal stimulus (reducing central bank monetary stimulus) and changing policy to growth from austerity via infrastructure spend and tax cuts.

The opportunities

We are seeing increased government spending in the UK and US. Both stock markets are in the midst of the third longest bull market in history, which was a concern. However the markets still have potential to go higher in this new pro-growth environment. The major indices may not move that much overall, but we are expecting a broader rally from companies whose shares have been rather stagnant for the last few years. 

Many of the cyclical and utility-like companies, such as industrials, construction, chemicals, etc. have remained cheap while the market has been led higher by the faster growing tech and consumer discretionary stocks like Amazon, Netflix, Nestle and Colgate. Some of these shares are now trading on very high premiums while the cyclical stocks are looking cheap. These are the ones which should benefit from the infrastructure spend specifically.

Technology is driving innovation and change and ultimately spurring global growth. Despite US president-elect Trump’s rhetoric on global warming we expect to see more focus on sustainable investing in 2017, as a result of commitments made by the rest of the world’s biggest powers to reduce their impact on global warming. We would therefore advise investors to include sustainable funds in their portfolio, especially those with a focus on making the world a better place by developing renewable energy, supplying us with healthier food and improving the workplace. The successful companies are profitable and increasingly outperforming their “less environmentally aware” competitors. A recent Morgan Stanley study reported 71% of individuals are interested in sustainable investing, with millennials and females twice as interested as other groups. This, and the huge leaps forward in technology that we’ve come to expect, are only going to keep growing this investment category. 

Markets sold off after the US election so emerging markets look reasonable value again. The oil-reliant countries have recently perked up with the revival in the oil price. They have great long-term potential, and are suitable as long-term holdings in your portfolio; though expect short-term turbulence as markets assess the Trump effect.

China is becoming interesting again. The world has underestimated how carefully this country is managing its growth. It stated that it wanted to be less reliant on exports and more focused on domestic growth and the data is showing that they are rebalancing faster than expected.

President Xi Jinping is interacting with the world in a proactive way and starting to behave as a statesman for the world’s second largest economy should do. He has indicated he is pro trade agreements and pro battling climate change.

Both are recovery plays. Banks will benefit from higher interest rates, while oil companies will benefit from higher oil prices. Both should also provide solid dividends and dividend growth. 

The challenges

There are a number of European elections in 2017 in Germany, France and the Netherlands. Countries in the Eurozone will be watching them closely. The outcomes could have wide implications for the future strength of the union, with the rise of “populism” giving an outside chance of a European breakup. Uncertainty over International trade agreements and Trump’s “irregular methods of communication” are also not helping.

All add to the uncertainty, but we believe they will rise to manageable levels rather than presenting a threat.

The value of sterling is a concern for UK investors investing abroad. Sterling could be whipsawed and move suddenly as it is being driven by sentiment rather than fundamentals.

Fixed income could be a tricky asset class to invest in a rising interest rate and inflation environment. It could be time to take some profits.

A survey of more than 1000 TD Direct Investing customers in December 2016 showed the biggest concern remains Brexit. This is not so much related to the outcome but to the perceived resistance to the decision and the potential inability of the government to swiftly exit the EU.

Summary

These are the areas we are most excited about for investment in the coming year. We also see opportunities in other areas. We continue to like income funds, for example, and believe funds that have an absolute return mandate (i.e. to beat cash in all markets conditions) have their place in a well-diversified portfolio. While the outlook is bright, predicting the exact movements of the stock market is never easy. Active security (and fund) selection will be important in 2017, but trying to be too clever and precise can often backfire – it is better to invest across a range of themes and adopt a long-term approach.

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The information we provide in this Investment Outlook are opinions provided by TD Direct Investing or one of its partners on whether to buy a specific investment. None of the opinions we provide are a personal recommendation.

Investors should be aware that the value of investments can fall as well as rise, you may get back less than you invested. Past performance is not a reliable indicator of future returns.If you are unsure about the suitability of a particular investment you should speak to a suitably qualified financial adviser.