Financial markets ended 2016 in a buoyant mood, but there is much on the horizon.
We asked a few leading fund managers to disclose the key investment 'shake-up(s)' they believe are approaching.
GLOBALISATION PEAKS, WORLD TRADE FACES COLLAPSE
The 'tectonic' turning-point looming on Columbia Threadneedle's horizon is the prospect that globalisation has peaked. Its demise will change the underlying dynamics of investing, says Toby Nangle, its head of multi-asset allocation.
Over the past 25 years, globalisation has seen the global labour force double, international trade as a proportion of global economic output increase by 50 per cent, and supply chains that cross national borders become the norm.
'Large firms have been well-positioned to profit and have seen their margins expand,' says Nangle.
However, last year saw success from populist electoral movements - Brexit and then Trump - that advocate a move away from international economic integration and cooperation.
Signs point to two big trade deals - the Transatlantic Trade and Investment Partnership, designed to cut trade tariffs and barriers between the US and the EU, and the Trans-Pacific Partnership, a similar deal between the US and 12 Pacific countries - collapsing or surviving in limited form.
John Goodall, head of private client research at wealth manager WH Ireland, believes political risk is the biggest challenge facing investors: 'Elections in France, Germany and the Netherlands in 2017 threatento undermine the euro and the very essence of European integration,' he says.
In a de-globalising environment, Nangle expects growth and inflation in developed markets to deteriorate, bond yields to rise and valuations of financial assets more generally to weaken in the medium to long term.
'We don't know how far this trend will go, but we do know that for investors the journey is unlikely to be smooth.'
EUROPEAN VALUE STOCKS OUTPERFORM
Fidelity International's multi-asset team believes European value stocks are at a turning-point after underperforming for most of 2016.
While the Euro Stoxx 600 was down by 1 per cent during the calendar year, the headline figure masks some big swings in performance, with the index down by a third at one point and notable moves within styles.
Defensive stocks, notably bond proxies such as staples and utilities, had the upper hand for most of the year, particularly in the wake of the EU referendum. But cyclical stocks started to rebound around July, moving to a significant premium to defensives.
Nick Peters, multi-asset portfolio manager at Fidelity, believes the return to favour will become entrenched in the second quarter of 2017.
'Many believe this move is overdone, but while we may see some pullback from recent strong performance, I expect cyclicals to continue outperforming,' he says.
'Changes to monetary policy and inflation should be gradual, which could create buying opportunities as markets overshoot.'
He anticipates much more volatility in terms of sector performance, with banks and other financials doing well and bond proxies de-rating as the outlook for monetary policy tightens and inflation starts to rise.
'The banking sector should be helped by the reflationary environment, allowing banks to charge higher interest rates and earn more on their lending,' he adds.
'Cyclical mining companies, while they led in 2016, might face a more difficult environment - particularly if we see the Chinese economy slowing as the authorities withdraw fiscal stimulus.'
EMERGING MARKETS TURN A CORNER
Back in 2001 Jim O'Neill, then at Goldman Sachs, coined the acronym Bric in a paper entitled 'Building better economic Brics'. The term became a symbol of the apparent shift in global economic power away from G7 economies to the developing world.
However, the economies of Brazil, Russia, India and China, and indeed global emerging markets in general, have confounded their long-term stock market potential by underperforming developed world equities.
From 7 April 2011 to the end of 2016, the MSCI Emerging Markets index is down 15.4 per cent in US dollar terms, while the MSCI World index is up 51.6 per cent - an aggregate difference of 67 per cent.
Gary Potter, co-head of F&C's multi-manager team, attributes that to slower-than-expected political and economic reform in the emerging world, and a more gradual transition than anticipated from investment-led to consumption-led growth.
Meanwhile, easier monetary policy in the developed world has powered a strong recovery in western markets.
Now, he believes the tide is set to turn. 'We may well be at that important turning-point; the investment barometer now looks like favouring a better relative performance from emerging markets henceforth,' he says.
'Commodities have stabilised, reform is underway in India and the political turmoil in Brazil is arguably past the worst. China continues to massage its economic growth as required and has plenty of firepower at its disposal.
'Governments in the west are likely to stimulate world growth through fiscal initiatives, which should help global growth - and by association global emerging market equities should do better.'
BOND MARKETS STABILISE
Huge monetary stimulus programmes - whereby central banks have pumped money into the financial system by buying bonds - have sent prices soaring and yields plummeting, often into negative territory.
However, according to Liam O'Donnell, fixed income investment director at Standard Life Investments, the election of Donald Trump as the next US president signalled a turning point for government bond markets.
'US Treasury yields have moved sharply higher as investors focus on a protectionist policy agenda and more aggressive fiscal expansion,' he says.
'This is in stark contrast to years of monetary easing and bond purchases, which had pushed bond valuations to extremes.
'Fiscal expansion is traditionally negative for safe-haven assets, and the sell-off in US government bonds has dragged all bond yields higher, though Treasuries have clearly underperformed.'
The question is: where do bond yields go from here? While Treasury yields could move higher in the short term, a return to pre-crisis levels is unlikely, he says.
10-year Treasuries should find support as yields move closer to 3 per cent - a level he believes offers 'good value' given structural issues still facing the global economy.
Corporate bond markets, meanwhile, have taken the Trump victory as positive for risk assets in the short term, in the belief that it will help US growth in 2017 and 2018.
'This should be positive for corporate bonds, but we would guard against complacency and believe there are still many unknowns and political risks,' adds O'Donnell. 'Careful company analysis and stock selection will remain key to delivering performance.'
ACTIVE MANAGEMENT RENAISSANCE
Investment experts expect central banks to retreat this year; although policy will remain accommodative, further injections of massive liquidity are unlikely.
'Those days appear to be over and we expect central banks to take a more balanced tone,' says Michael Stanes, an investment director at Heartwood Investment Management.
Abundant liquidity from central banks has seen money pour into passive funds, making indices very hard to beat; that liquidity has also crushed bond yields, causing investors to pile into defensive, low-growth, dividend-paying shares - so-called bond proxies - without regard for individual company merits.
But as liquidity is withdrawn and yields rise, James de Bunsen, a multi-asset fund manager at Henderson, thinks active management will have a renaissance.
'The wall of liquidity created by QE [quantitative easing], and the concurrent plunge towards zero/negative interest rates, created an environment where company fundamentals were hugely subordinated to generic qualities such as quality and yield,' he says.
'There has been very little dispersion within sectors, but huge dispersion between sectors - the latter driven by any perceived similarity to scarily expensive fixed income investments. That bond proxy trade looks to be retreating from its zenith as central banks step back.'
Some $400 billion has flowed out of actively managed funds since 2009, with $1.5 trillion going into passives, according to Bank of America Merrill Lynch.
'A large proportion of this is purely price-driven and will stay in passives, but if stock-pickers return to form helped by a normalisation of monetary policy, the trend might easily reverse, giving those same active managers another powerful tailwind,' adds de Bunsen.
TURNING-POINT TIPS WHAT TO BUY TO PROFIT
Adrian Lowcock, an investment director at multi-manager fund provider Architas, recommends the Troy Trojan fund run by Sebastian Lyons for a reversal of globalisation.
The portfolio has defensive characteristics, with exposure to inflation-linked assets and gold as well as equities and bonds. 'Having these four pillars means Lyons has the right tools to navigate through a reversal of globalisation,' says Lowcock.
Neptune European Opportunities
Gavin Haynes, managing director of Whitechurch Securities, highlights Neptune European Opportunities for its focus on out-of-favour areas such as European banks trading on depressed valuations.
'Manager Rob Burnett believes this is a once-in-a-generation opportunity to invest in value,' says Haynes. 'The strategy has risks, but the potential long-term rewards look compelling.'
Hermes Global Emerging Markets
Guy Kelland, managing director of financial planning firm Kellands, likes Gary Greenberg's Hermes Global Emerging Markets for his pragmatic approach and consideration of top-down macroeconomic factors alongside stock fundamentals.
'It's quite vital in emerging markets to bring macroeconomics into the debate,' he says. Kelland accesses the fund through F&C's multi manager range.
SPDR Barclays 1-5 Year Gilt ETF
With higher interest rates closer than ever, Ben Kumar, an investment manager at 7IM, believes it is most sensible at this point to replicate the stabilisation aspect of bonds.
'That means getting as close to cash as possible whilst still earning a better return,' he says. The SPDR Barclays 1-5 Year Gilt exchange-traded fund yields around 0.5 per cent and has almost zero exposure to interest rate moves.
CFP SDL UK Buffettology
A return to the importance of stock fundamentals favours strong stock-pickers. Andrew Merricks, head of investments at Skerritts Wealth Management, rates Keith Ashworth-Lord of the CFP SDL UK Buffettology fund: 'Keith generally finds better value hunting in smaller-cap waters.'