With the political and macro economic landscape set to continue to change, Coutts remains broadly positive towards markets generally but sees the need to be selective with only a slight preference for risk assets overall. In some areas Coutts has rotated into more defensive positions. Elsewhere, there is a preference for alternative asset classes such as absolute return strategies and property over government bonds.
Coutts remains positive on the investment themes identified at the beginning of the year. Some of them – such as technology and European equity – have already delivered good results. Emerging market bonds have also been added to the list of favoured asset types, as emerging economies benefit from stable global growth.
Mohammad Syed, Managing Director and Head of Global Markets at Coutts, said: “We will remain steadfast in following our investment principles, focusing on opportunities that we believe are inexpensive relative to their long-term value. The normalising global economic environment (with growth picking up and interest rates rising) has been positive for risk assets and has pushed equity and credit valuations up, but we are watching closely for signs of slowdown.”
Reflation implies that growth and inflation should normalise from their low mid-216 levels. This environment is typically positive for risk assets such as equities (including technology and financials) and high yield bonds. We expect this trend, which started in the US, to persist in the medium term and become more prominent in Europe.
Bonds – Within bonds we prefer credit to government bonds. Low yields suggest poor returns going forward. Emerging market debt continues to look attractive with a combination of attractive yields and potential for capital gains.
Equities – We retain a slight preference for equities overall on the back of the positive macroeconomic backdrop and receding political risks. However, we are selective in our positioning and favour relative value within the asset class.
Alternatives - Alternative investment strategies offer an attractive risk-adjusted return and provide diversification away from equities at a time when traditional diversifiers – such as government bonds – offer poor returns.
Sterling is undervalued in our view, on a medium to long term horizon versus the US dollar; similar to the extremes of 2008 and 1985. Over the long-term these valuation measures have a fair track record for forecasting sterling performance over the medium to long term.
European Equity is cheap relative to US and the fundamental outlook is positive. With political risks easing, international investors who abandoned Europe in 2016 are now purchasing European assets again.
Healthcare has performed well since the US election and continues to have long term appeal. It combines attractive valuations with a positive fundamental outlook. Earnings and sales are improving steadily.
Advanced economies are continuing to grow helped by strong consumer spending in the US and Europe.
Emerging markets are picking up, led by India (likely to grow at 7% in 2017) and China (6.5%).
Data indicates there is a low risk of US recession. Growth numbers and leading indicators are firmly positive and the US economy doesn’t have big macro imbalances (e.g. soaring inflation or current account deficits).
Inflation is drifting up in advanced economies but the factors keeping it subdued (e.g. demography, price competition from the internet, weak trade unions, conservative fiscal policies in most countries) remain in place.
Mohammad Syed continued: “As we look ahead we see a stable global economy underpinned by growth in the US that will continue to provide support to markets. The investment themes we set out at the beginning of the year have performed well, and we continue to see potential for growth in these areas. In the meantime we’ve added emerging market bonds to our portfolios and funds, to benefit from strengthening economies in the developing world.
“As ever there are risks on the horizon but uncertain times bring new opportunities into view. Change is inevitable, and making sure your investments are positioned for the future is key to meeting the challenges ahead. With this in mind we will be sticking to the regimen that has served us well. Throughout the coming months we will be guided by our investment principles to find attractively priced quality investments with the aim of protecting our clients’ wealth in the long term.”