Coutts continues to see value in equities this year with particular conviction in sterling, global healthcare and alternatives. Financial credit, Europe and Japan are also identified as key opportunities for growth by Coutts in its 2018 Investment Outlook – Investing through disruption. The Outlook continues to see opportunities for investors but also recognises that the economic landscape is changing.
Coutts oversaw an increase in the assets under management (AUM) in 2017, up to £17.86bn, in addition to strong investment performance, achieving first quartile compared to peers over 1, 3 and 5 years across most of its strategies, according to ARC.
Mohammad Syed, Managing Director at Coutts, said “Long-term returns from government bonds in the US and the UK remain vulnerable to rising interest rates and we remain significantly underweight. We prefer corporate bonds, particularly financial credit as well as emerging market debt given the US dollar weakness.
“Within equities, outside of the UK, we are focusing on Europe and Japan as well as sectoral themes such as healthcare and energy.”
Sterling – The pound still looks attractive by long-term standards and remains at the low end of its 40-year valuation range. Coutts expects it to recover further against major currencies, especially if the UK trade deficit begins to fall which should begin soon, in Coutts’ view, provided Brexit negotiations are not too prolonged.
Global Healthcare - The sector remains inexpensive by long-term standards and continues to deliver healthy earnings growth, which investors haven’t yet appreciated fully. Coutts thinks pharmaceutical and biotech companies should benefit from long-run demographic trends, with older people across the world increasingly prepared to spend heavily to live healthier lives.
Alternatives – Diverse alternative investment strategies, ranging from trend-following to market neutral to global macro, still look attractive and provide ballast within portfolios, helping to offset some of the risk that comes from equities.
Challenges and opportunities for 2018
Global Growth – Coutts thinks the global manufacturing cycle is peaking about now, which raises the question: what next for the world economy and where to find value for investors? With robust consumer and investment demand, low inflation and accommodative monetary policy in most countries, Coutts is expecting the looming slowdown to be gradual, with world growth as a whole still firm through 2018. With company earnings in the major markets likely to continue rising and no sign of US recession on the horizon, Coutts continues to have confidence in equities, with a bias towards those regions where it sees the growth cycle persisting for longer, like Europe and Japan.
Inflation - In its search for inflation-beating returns Coutts favours segments of higher-yielding bonds, like financial credit (yielding over 5%) and emerging market debt, and equities, where dividend yields are solid (4.2% for the UK’s FTSE 100) and earnings are growing.
Japan – Coutts’ view is that Japan’s prospects are normalising and that the outlook for Japanese equities is positive. Furthermore in Coutts’ view, corporate balance sheets are healthy and equity valuations look attractive compared to other major markets.
Equity Valuations - Many traditional measures used to value equities indicate that valuations are on the high side, with some in the US more than double their historical norms. Since high valuations are associated with lower future returns, this underscores the importance of identifying areas of the market that are undervalued by investors, consistent with our investment beliefs. Coutts’ analysis indicates that these areas can be found – as reflected in its regional themes (e.g. Europe and Japan) and sectoral choices (technology and healthcare).
Emerging Markets – Coutts sees two factors influencing emerging market performance in 2018. The first is the strength of global economic growth– manufacturing exporters in East Asia and commodity producers like Brazil and South Africa do well when global growth is strong. Second is the direction of US interest rates and the dollar – faster rate rises than currently expected would lead to a rising US dollar, a headwinds for emerging market bonds and equities. Coutts’ analysis suggests that global growth and trade will be steady in the next year, that US interest rates are not likely to rise unexpectedly, and that investors in emerging markets should not be put off by the usual political complexities.
Mohammad Syed continued; “As long-term investors, we see the need to look beyond the current environment to the structural shifts emerging around the world that will influence the global landscape in decades to come and fall firmly within the scope of our investment research. We see changes in global trade, technological innovation and government policies as three key areas that when combined have the potential to fuel significant change through the rise of inequality.
“One trend we see that could have a profound effect on the world is the growing gap in developed countries between the wealthiest and the poorest people. A combination of technological change and globalised trade has lowered the demand for less skilled workers in the developed countries and squeezed their earnings, particularly in manufacturing. By contrast, more highly skilled – and typically higher paid – occupations have fared better.”
“Changes in employment patterns have magnified the effects of these inequalities. Developed economies have moved away from settled ‘jobs for life’ to working patterns that entail shorter tenures at more employers. At the same time, defined benefit or ‘final salary’ pension schemes gradually became unaffordable and have been closing down, making workers more responsible for funding and managing their retirement. In our view, understanding these long term trends is essential to the management of wealth across generations. It also helps to inform our investment thinking, giving us a range of ideas to explore.”