HOW WE ARE POSITIONED FOR Q1 2018
We anticipate that markets will be trading well into the beginning of the year, after the very strong finish of 2017. We expect 2018 to be another year of synchronised growth in the world with Developed Markets growing at around 2.3% and Emerging Markets to grow at a level close to 4.8% on average.
This environment should be still supportive for stocks at least for the Q1 and Q2 as we will benefit from the US tax cuts, and until the rates normalization will kick in.
- We expect the Bond Markets to underperform, especially longer dated Government bonds, as the Central Banks led by the Fed will continue to raise rates and remove their accommodative monetary policies.
- Commodity markets are expected to remain at a mixed to stabilised level, with Oil taking a breather after the massive run up in the past few months, but still long term bullish, while Gold still trading in a range.
- The US Dollar is still in a downtrend for the long run, as expected rate hikes have been discounted, and the markets are now focusing on other countries to raise interest rates.
- The general consensus id for the Fed to hike 3 times this year, but we see a real risk of potentially 4 hikes during 2018, as growth and inflation are picking up.
- We like to be overweight European and Japanese stocks, as valuations are cheaper and we believe the Euro and the Yen will keep appreciating versus the Us Dollar.
- While Brexit and the Italian elections might be a cause for short term uncertainty, we are very impressed with Europe’s economic indicators.
- We are still constructive on Emerging markets and China as we see the economies growing at fast pace and deliver strong EPS growth.
MARKETS OVERVIEW
Equities – Constructive
- Equities across the world have started the year with a bang carrying on the strong momentum from December 2017, with record inflows in equity and equity funds.
- Our forecast for Year End Word stock markets is high single digits, so that means that we are by no means expecting the strong momentum seen in January to carry on at the same pace over the year.
Bonds – Bearish
- A rising interest rate means most bond markets are vulnerable. After most of last year when bond prices have been stable, we have seen yields starting to break higher toward the end of last year and then this year. We believe US 10yr will reach 3.25% by year end and we expect the yield curve to keep steepening as long dated bonds will sell off, while short dated will stay stable.
- If investors need to be positioned in fixed income, we prefer either inflation protected bonds (e.g. TIPS) or high quality corporate bonds with short durations trading at or near face value.
Commodities – Constructive
- Oil prices have rallied in the past 6 months with limit on supplies have been supporting prices.
- Oil demand continues to grow at a steady pace, while the US rig counts has been increasing but at a lower speed than expected, while the OPEC has been very successful to maintain the current production unchanged. While we think short term, we could see a correction in the Oil price we remain bullish for the long term, being also wary of developments in Saudi Arabia.
- Gold has also recovered the recent losses taking the lead from a very heavy sell off in the US Dollar at the end of 2017 and the beginning of 2018.
- We think Gold is still in range 1250/1350.
Currencies – Consensus bearish on USD
- While the passage of the Tax Cut and the rising bond yields should have been positive for the US Dollar, the greenback sold off heavily at the end of 2017 and in January 2018.
- As rate hikes by the Fed are mostly expected, the market is focused on other Central Banks to follow and change their accommodative.
- While we believe that the Dollar can strengthened in the short term, we expect the downtrend to carry on in the medium term.
Alternatives – Bullish
- We are generally positive on the property markets, with a preference for commercial over residential. Our favoured countries for exposure include Australia, UK, South East Asia, USA, and Vietnam. Please ask for more information on some of the projects we are currently working on.
- We also have a positive outlook on Private Equity as we see better growth opportunities, whilst lower valuations are seen across the industry compared to most stock markets.
BULLISH SECTORS
- Technology, Cyclicals and Financials were the best performer sector in 2017, while Utilities and Real Estate underperformed.
- Technology stocks have had the best performance in the last 12 months. Given that it is the most expensive sector, we are willing to take some profit on the sector and looking to re-engage in case of a 5%/10% correction.
- We think buy dips on energy and Oil stocks, given the strong fundamentals and outlook on Oil price. They still provide some of the most compelling dividend in the markets.
- We are still positive on the Financial sector after a rally last year; valuations are still not expensive, and we see a renewed push up in interest rates in the US and in the rest of the world.
- We generally like Cyclicals especially in Europe and in Asia, that will benefit from the strong growth of the economy.
HOW WE MANAGE RISK – PORTFOLIO PROTECTION, HEDGING & TAKING PROFITS
As opposed to just going to cash, we prefer alternative strategies such as hedging via options and option writing strategies to smooth out portfolio volatility.
We also actively monitor profits using trailing stop losses with the view of protecting and locking in gains.
PORTFOLIO MANAGEMENT SERVICES
Please let us know if you would like to hear more about our Discretionary Portfolios and how we consistently generate an additional 0.5% to 1.5% per month using our portfolio Enhanced Income Overlay.
CONTACT
We would be more than happy to have an informal chat about these and the other services we offer as well as the current opportunities we are looking at.