Three managers, three views: the investment outlook for 2018, December 2017

Last week, we met up with three fund managers and asked them for their outlook on property, bonds and equities in 2018. Here's what they had to say: 

Ainslie McLennan, co-manager, Henderson UK Property

Post-Brexit was a real journey. I've never before in my career had to close a fund. But, having come out the other side, I still think it was the right thing to do. Selling buildings at fire-sale prices would have simply crystalised losses. As it happens, the sector actually performed well overall in 2016 and 2017 and has recovered the losses while the income payments also remained steady.

The devaluation of the pound, post-Brexit, helped keep overseas buyers more active than we expected and, while they focused their purchases on 'trophy assets' – the really high-end properties – it did keep the market more bouyant.

That said, I'm cautious on the outlook for the asset class in 2018-2019. Landlords are actually having to increase the incentives to attract tenants and rents are not rising. We have sold out of our London West End properties in the past year and instead have five smaller offices – one of which has a government tenant on a 10-year lease.

We also sold out of our regional holdings. While the Northern Powerhouse should make property more attractive, it's actually quite hard to let space and grow rent. So we've stayed more invested in the South East of England, where good logistics and distribution offers a steadier income. 

The retail sector is changing and the high street is no longer attractive. Instead we prefer warehouse parks. The choice of tenants you can attract is great so you can really create the right 'mix' of outlets to get dwell-times longer. Aldi, for example, is a great pull and if you have refreshments close by, shoppers linger for longer. We're also looking to the future and installing electric chargers in car parks, which should also attract more visitors. 

We've also invested more in student accommodation. We have four sites now in Glasgow, Durham, Exeter and Kingston. It's a reasonably Brexit-proof area as many tenants are Chinese. Data centres are another growing area and fall into the 'alternatives' bucket of the fund along with care homes and private hospitals which are reasonably inflation-proof.

2018 will have its challenges, and I don't expect capital growth to be high. But steady, sustainable income is still possible and, with 89 properties and 608 tenancies, I'm confident we can weather Brexit. 

Torcail Stewart, co-manager of Baillie Gifford Corporate Bond

We're finding a lot of opportunities in the UK market at the moment. We like out-of-favour areas and it's fair to say that the UK is unloved right now. As and when markets have experienced a correction, we've been buying bonds we like at cheaper prices. An example of this is Sally Beauty. It supplies hair dye to hairdressers and at this time of year especially, is high in demand. 

I'm relatively sanguine about the outlook for bonds next year. There is still a lot of debt in the global system – more than before the global financial crisis, believe it or not. And the central banks will be very slow to raise interest rates. There is no real inflation: unemployment is low but there is still no wage growth. So there is plenty of slack left in the system.

Instead of being worried about inflation – which can hurt my asset class – my bigger concern is that the new normal becomes like Japan, which experienced more than two decades of deflation.

I'm finding plenty of opportunities in the area where investment grade and high yield bonds cross. I'm also finding ideas in out of favour areas, companies where there is management turnaround taking place, and in M&A targets. And the range of holdings in the fund makes for good diversification: from Johnson & Johnson to Moy Park, a UK chicken farmer, from BUPA to Netflix and from John Lewis to Greene King – there are plenty of attractive bonds from which to choose.

Many of my ideas are in the UK, which is looking better value than the US or Europe right now. And I have around 10% in cash at the moment, waiting for the opportunity to invest as and when the market pulls-back.

James Thomson, manager of Rathbone Global Opportunities

Everyone is talking about equity markets being overvalued, but I've never had so many ideas, or been as fully invested, as I am today. What people are forgetting, I think, is that valuations are not a good indicator of performance. There is no correlation between the two. A better indicator is the business cycle where there is a strong relationship with company performance.

Now, some leading indicators of the business cycle are pointing down, so the second half of next year could be more difficult for stock markets worldwide. But you can overcome these hurdles by investing in companies that can 'run up the escalator' – those that can do well even in tougher economic conditions.

I very rarely invest in emerging markets companies, as I feel my strengths lie in developed markets and there are plenty of good emerging market funds out there anyway. However, I have an exception at the moment: a holding in Tencent. Tencent is the beating heart of the Chinese internet and the company is finding ways to monetise their different streams in a way that developed companies have struggled to do. 

Speaking of the internet, I'm also very positive on Amazon. I think the company is actually depressing earnings as they are investing so much to keep growing. More than 50% of online sales over Black Friday weekend were via Amazon and they are now going into the food delivery space with Amazon Fresh.

Video gaming is also experiencing a 'super cycle', in my view. 1.6 billion people play regularly and 50% of games are now downloaded. People buy the game and also make in-app purchases.

Away from cyber-space there are also some boring but excellent opportunities companies that make replacements parts for boilers, for example. Anyone who has experienced a faulty boiler will know that these parts tend to be viewed as time sensitive rather than price sensitive! Another example is water filters in China. While we worry about herbicides and pesticides, filters in China are making sure people don't drink heavy metal residue!

In the US, it is highly likely that the US corporate tax bill will go through. It will be the biggest reform since 1986 and one of the most pro-growth initiatives in decades. It's less a tax cut and more an encouragement to invest. 

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.