Five fund managers, nine journalists and a bell…. November 2017

1/11/17 - Earlier this week we co-hosted one of our popular speed-dating events: we invited nine journalists to interview five fund managers and get a story in just seven minutes. While the journalists concentrated on getting their investment scoops, we took the opportunity to ask each manager about their outlook for 2018. Here’s what they had to say.

Alastair Mundy, manager, Investec UK Special Situations

“Low interest rates for the past decade have pushed bond yields lower. This in turn has benefited a certain group of stocks – those with a decent dividend that are deemed to be lower-risk equities and those with higher growth prospects. More and more investors have bought these companies and the price of these stocks has become more and more expensive.

“If interest rates do turn and start to go up finally, this could reverse. The US Federal Reserve is now ending quantitative easing and, if other central banks follow their lead, it will be interesting to see how the bond market reacts. A lot will depend on the pace of change.

“There could then be style rotation and value stocks and funds could start to outperform again. Value investing has struggled for some time now, but it isn’t dead as some have suggested, it has just been resting. The strategy has worked for many decades and been rewarding, and I see no reason why this can’t happen again. What the past few years has done is weed out the value-imposters, so there are fewer, but truer, value funds around today.”

Mark Nichols, co-manager, Threadneedle European Select

“A number of major political events are now behind us, but there are still a few ahead: the Spain/Catalonia independence issue needs to be resolved and we have Italian elections next year. I don’t expect either to throw the eurozone off-course, but they may cause uncertainty in the short term.

“Stock market valuations aren’t a great indication one way or another in terms of how well European equities could do next year – they are neither cheap nor expensive. All that says to me is that ‘normal’ equity returns should be possible: there is nothing to suggest a correction is on the cards but, at the same time, we’re not in a raging bull market.

“So I have quite a balanced outlook. We invest in companies of all sizes in this fund and I’m comfortable with the holdings we currently have and the constant stream of new ideas we can find. We have a bias towards the larger mid-cap area at the moment, so no real household names, but good solid companies nevertheless.”

Mark Sherlock, manager, Hermes US SMID Equity

“One year on from the US election, the oversold story in my view is that of the political shenanigans. The undertold story is the health of the US economy. Unemployment has fallen, business and consumer confidence is high and the Federal Reserve obviously thinks it is in good shape as interest rates are rising.

“When Trump was elected last November (and even in the few weeks running up to the election) the market experienced a shift in investor sentiment: Trump was promising that we wouldn’t be stuck in a low interest rate/low growth world forever, and this injected a level of confidence into the market. The fact that, ultimately, he has yet to follow through on many of his other promises, is yet to be reflected, but overall he has been positive for the US stock market.

“Importantly, the continued rise of the market and the economic success of the country will be his hallmark – so he has a vested interest in making sure neither stall. If they do, so could his presidency.

“The US market is on the expensive side now, but the stock market could still be driven higher by underlying earnings growth next year. I’m seeing solid and increasing demand for the products and services of the companies I am visiting. They have decent operating leverage and, if the proposed corporate tax cuts go through, it could provide a further boost to the stock market across the board, but especially for the smaller and medium-sized companies that I own.”

Matthew Dobbs, manager, Schroder Asian Alpha Plus

“I’m broadly positive about Asian equities going into 2018. We have more positive company fundamentals, good operating environments and the economies are generally in a healthier state. The market is not expensive, the capital cycle is quite favourable and there are, as always, plenty of opportunities. Companies have been very frugal and, as their earnings are increasing, their balance sheets are looking in good shape.

“As has been the case for quite a few years now, China is the obvious question mark hanging over the region. A lot of people are cautious, but the problems are well known and I don’t think 2018 will be the year it all falls apart.

“The technology sector is now a big part of the Asian market, accounting for about a third of all companies. On the whole I think that is a good thing. There are two types of tech in my view: those that are actually manufacturing companies, which make products and are used to deflation and the ups and downs of the economic cycle.

“The second are those with huge growth potential, but not necessarily huge (or indeed any) profits in the early years. This category tends to start off with many companies, but then a lot go bust and the survivors then do very well. The consumer loves this type of company and the young consumer - of which there are plenty in Asia - is very open to new ideas and ways of conducting business.”

Gary Potter and Scott Spencer, F&C MM Navigator Distribution

“The asset class we are most positive about for 2018 is Asian equities. It’s a relative-value call, compared with other equity markets, in this expensive world we are living in. Perhaps more importantly, it is also an area where good active managers can add a lot of value, and we think there are plenty of excellent funds to choose from. At these levels, an investment today, could be well rewarded over the long term.

“At the other end of the scale, we are negative on bonds. If we assume that the change in rhetoric from central banks actually leads to a permanent change in the direction of interest rates and a withdrawal of quantitative easing, it will be difficult to make money from the asset class. It is inconceivable that, having pumped all this money into the system, its withdrawal won’t have an impact. Bond yields should go up, which means the price of bonds should come down. We are particularly concerned about European high yield bonds, where we think there is little room for error.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.