In the weeks following November’s gloomy budget, Britons could have been forgiven for casting an envious glance towards foreign shores. To add insult to the injury of an outlook for the UK clouded by low growth, dismal productivity and stagnant real earnings, the prospects for the rest of the world are much brighter. The International Monetary Fund (IMF) expects the global economy to grow by 3.7 per cent in 2018, which would be its best year since 2010.
Back in the UK, the IMF shares the pessimistic view of the Office for Budget Responsibility, which has told the chancellor to expect economic growth of just 1.4 per cent over 2018. It does not believe the country is set to return to pre-financial crisis levels of productivity any time soon, and the impact of Brexit is an additional drag. The IMF’s own view is that the UK will manage 1.5 per cent next year, with consumer spending already slowing amid the inflationary squeeze on living standards.
These downbeat assessments compare unfavourably with the 2.5 per cent growth the IMF expects from advanced economies overall. ‘The global recovery is continuing, and at a faster pace,’ says the organisation’s chief economist, Maurice Obstfeld. ‘The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence; we see an accelerating cyclical upswing.’
In the US, growth is underpinned by supportive fiscal and monetary policy, with the pro-business Trump administration promising corporate tax cuts and the US Federal Reserve’s shift towards higher interest rates proceeding only gradually.
The eurozone’s recovery is continuing, with domestic demand strong – courtesy of ultralow interest rates – and export performance improving in many countries. Politics in Europe also look more stable, despite uncertainty in Germany as Angela Merkel attempts to shore up support. The worst fears about the rise of populism throughout the EU did not come to pass in 2017.
Japan, too, is holding up, thanks to fiscal support from government as well as additional stimulus from investment ahead of the 2020 Olympic Games. Elsewhere, economies such as Canada and Australia should benefit as stronger global growth drives rising demand for their commodities.
Meanwhile, across the world’s developing economies, the IMF predicts 4.9 per cent of growth during 2018, led by India and China delivering 7.4 per cent and 6.5 per cent respectively. India’s reformist government continues to push through structural reforms, while in China policymakers’ interventions have also been expansionary.
The prospects for other emerging markets are also promising. Chinese demand for imports should support economies throughout Asia, while rising demand for commodities will benefit producers in Latin America and Russia.
This is not to deny the downside risks that threaten the improving outlook. ‘Numerous global problems require multilateral action,’ says Obstfeld. Geopolitical tension is a major source of anxiety, amid the stand-off between the US and North Korea, and strain at other flashpoints in the Middle East and even in the Ukraine.
The principal financial risks include the move towards tighter monetary policy throughout much of the world. If overdone, tightening could choke growth, given the liquidity central banks have provided to financial markets, which has underpinned corporate fundraising. The Trump administration in the US remains unpredictable, and its promise of tax cuts looks tough to deliver politically. It also continues to talk the language of protectionism, which represents a threat to global trade. In China, meanwhile, the authorities are pondering how to curb credit growth without causing a sudden shock. The impact of a collapse in the Brexit negotiations shouldn’t be overlooked either.
The disparity and gravity of these risks partly explains why there is so little consensus among forecasters about how the broadly positive macroeconomic outlook will translate into asset price performance during 2018.
In the UK, a recent straw poll of 27 banks, fund managers and stockbrokers produced year-end forecasts for the FTSE 100 index ranging from 6500 to 8600; the mean prediction among those forecasts came in at 7639, which would translate into meagre returns for investors in UK equities over the course of 2018.
Certainly, many forecasters expect to see other world markets perform more strongly. For the US, Goldman Sachs, UBS, Deutsche Bank and Credit Suisse all predict double-digit growth from equities. David Kostin, chief US equity strategist at Goldman Sachs – which forecasts an 11 per cent return over 2018 – says: ‘The current equity market valuation is certainly stretched in historical terms, but it does not appear unreasonable based on the high level of corporate profitability.’
In Europe, improving economic performance promises to drive earnings growth for both domestic businesses and multinationals. And while earnings may not be as strong as in the US, stocks on this side of the Atlantic start the year on valuations that look less stretched. Credit Suisse is forecasting a return of a little over 8 per cent from eurozone stock markets in 2018, although it expects emerging market equities to deliver returns of 12 per cent.
What about other asset classes? In the fixed income universe, investors continue to worry that bonds are trading in a bubble. Hundreds of billions have flowed into fixed-income assets, courtesy of central banks’ quantitative easing policies, but it’s unclear what will happen when monetary policy begins to return to normality.
Bond bears point to sell-offs in areas such as junk bonds, where prices fell back sharply during the final months of 2017, as a sign of unhappier times to come throughout the fixed-income universe. UBS argues: ‘Bond returns in general will likely be limited over the next six months, as yields are still low, and we expect a moderate yield rise both in the US and in Europe.’
Elsewhere, the World Bank foresees better returns from commodity prices during 2018, driven partly by an increase in the oil price from $53 a barrel to $56. ‘Energy prices are recovering in response to steady demand and falling stocks,’ says senior economist John Baffes. He also looks forward to rises in the price of metals, including gold, which tends to rise during periods of rising US interest rates.
There will be opportunities in other asset classes too. In real estate, analysts at PwC point to rising demand for commercial property in continental Europe – particularly in Germany, which sees an opportunity in Brexit to snap at London’s heels as Europe’s most important financial centre.
Institutional investment flows into infrastructure continue to increase, while alternatives are also seeing strong demand.
For UK investors, most of these asset classes will require exposure to non-sterling investments, leaving them vulnerable to further weakness in the pound – already down close to 15 per cent against the dollar and the euro since the Brexit referendum in June 2016. UBS, for one, thinks sterling could deteriorate still further over the year ahead, even though the Bank of England’s return to higher interest rates should provide support.
‘A decelerating economy compounds the uncertainty around Brexit negotiations,’ UBS’s analysts warn. ‘The bank’s hawkish shift does not change our sterling views, as it is taking place against the backdrop of weaker rather than stronger macro fundamentals.’
For investors, making sense of this confusing picture will not be straightforward; making short-term tactical calls is fraught with danger, particularly given the uncertainties that abound. That said, the views of many strategists have now begun to coalesce around certain themes. The strongest of these ideas have both short-term relevance and enduring appeal, and therefore represent a potential roadmap for reorienting your asset allocation in the evolving financial climate.
Global fund and trust tips
Artemis Global Income (core growth and income)
TR 1 year 13.7%, 3 years 40.1%, yield 3.4%
Top performer since inception in July 2010, but performance cooled in 2017. The fund has a big underweight position to the US, which has contributed to short-term performance becoming more middling, and instead favours Europe, where nearly half of the portfolio is invested. With 40 per cent in fi nancials, this fund will benefi t if interest rates rise in 2018.
Fundsmith Equity (core growth)
TR 1 year 23.5%, 3 yrs 79.4%, yield 0.7%
Those who follow the investment maxim ‘buy low, sell high’ may be wary of buying a fund that has been on a hot streak of form since launching in November 2010. But in the continued record low interest rate environment, the fund remains a fi rm favourite. According to Mick Gilligan of Killik, the high-quality companies favoured by Terry Smith will continue to be highly prized and reward long-term investors.
TB Saracen Global Income & Growth (adventurous growth and income)
TR 1 year 13.8%, 3 years 38.7%, yield 4.1%
While this fund primarily invests in global leading firms, the two managers at the helm (Graham Campbell and David Keir) have been gradually shifting the emphasis towards more cyclically sensitive companies at the expense of the defensive areas of the market, on valuation grounds. Jason Broomer of Square Mile believes this will stand them in good stead should the health of the global economy remain in fair shape.
River & Mercantile World Recovery (adventurous growth)
TR 1 year 22.3%, 3 years 53%, yield 0.7%
This fund also favours ‘cyclical’ businesses, and as such should also benefi t if global economic growth continues to be robust. The manager, Hugh Sergeant, is a value investor. He snaps up shares in businesses whose profi ts he believes are temporarily depressed. Financials account for almost a quarter of the fund. It has outperformed most global funds since launch in March 2013.
Standard Life Investments Global Smaller Companies (adventurous growth)
TR 1 year 31%, 3 years 81.3%, yield 0%
Over the long term small companies outsmart their larger peers in producing higher returns. To play that trend, this fund is described as a ‘solid option’ for those who have the patience to buy and hold for a decade or longer. Broomer says the fund’s preference for ‘quality businesses’ is a ‘lower risk way to access what can be a higher-risk asset class’. He adds: ‘We would expect this investment style to add value for investors over the long term and help minimise losses when investor sentiment turns sour.’
Monks (MNKS) (core growth)
SPTR 1 year 41.5% , 3 years 98.1%, premium 4.6%, yield 0.2%
Monks shares have stormed ahead since Baillie Giff ord’s Global Alpha team took charge in March 2015. Jean Matterson of Rossie House Investments and Peter Hewitt of F&C chose it last year and are sticking with it, despite the trust trading on a premium. Matterson is a fan of BG’s long-term approach to investments; she says: ‘This is a true stock-picking fund, aiming for capital growth, with no limits to geographical or sector exposures.’ Around a quarter of the portfolio is in Europe including the UK, another quarter in Asia and emerging markets, 7 per cent in Japan and the rest in US companies, many of which generate their revenue internationally.
Bankers (BNKR) (core growth and income)
SPTR 1 year 29.9%, 3 years 58.6%, discount -0.6%, yield 2.1%
Bankers has achieved above-average five-year returns within the global sector, and its dividend has been raised every year since 1967. UK exposure has been progressively reduced to 27 per cent, leaving the portfolio well-diversified by both geography and sector. Management is split between six regional specialists, co-ordinated since 2003 by Alex Crooke, and the investment process is bottom-up and value-oriented.
Henderson International Income Trust (HINT) (core growth and income)
SPTR 1 year 20.7%, 3 years 52.9%, premium 2.4%, yield 3%
HINT differs from other global income trusts in explicitly excluding the UK, making it a good compliment to UK-oriented portfolios. Launched in 2011, its fi ve-year returns are competitive within its sector. Lead manager Ben Lofthouse favours a value-oriented approach and oversees asset allocation, with Europe currently accounting for 39 per cent, the US 36 per cent and Asia including Japan 25 per cent. Charles Murphy of Panmure Gordon says: ‘The trust’s nil UK exposure makes it an idea compliment to more UK-oriented exposure.’
Hansa Trust A shares (HANA) (adventurous growth)
SPTR 1 year 23.8%, 3 years 17.4%, discount -26.7%, yield 1.6%
Hansa Trust invests for growth in a globally diversified portfolio of hard to access specialist funds, coupled with a strategic stake in a Brazilian port operator. It has had a dire 10-year run, but picked up a little in 2017. John Newlands of Newlands Fund Research suggests investors should not be scared off by Hansa’s 21 per cent commitment to Wilson Sons, nor by its reluctance to tackle the yawning discount on its shares with buybacks. ‘The trust has a tightly run and defensive portfolio, insulated somewhat from the vagaries of European economic scene. I believe that patience will eventually be rewarded,’ he says.
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