Contrary to many commentators’ expectations, 2017 has been another good year for investments. However, for a UK sterling based investor, volatility has returned as currency movements have distorted and magnified market movements. In particular, sterling strength in the second half of the year has acted as a significant headwind for overseas investors endorsing the importance of maintaining a diversified approach.
As we approach the end of 2017, valuations in most markets are quite full in comparison with historical measures. However, after a minor correction in November following uncertainty about the passage of new US tax legislation and measures by the Chinese authorities to curb leverage in it domestic bond market, the feel-good factor appears to have returned for the moment with a Santa rally underway.
The outlook for 2018 is finely balanced in our view – the good news is that the economic environment remains supportive with continuing low interest rates and no significant pull-back of Quantitative Easing (QE). In addition, corporate earnings have generally been stronger than expected in 2017 and forecasts continue to look promising for 2018. Leading respected economic bodies are forecasting global growth of 2.5%-3% which is broadly in-line with long term trends.
The future path of interest rats and the fate of QE are all important in determining liquidity and ultimately whether the bull market can retain the momentum to push yet higher. In the meantime, markets continue to climb a ‘wall of worry’ and with the exception of the odd bubble, such as bitcoin, investors remain alive to risk; only investor euphoria and irrational valuations are potential signals for a turning point and significant reversal.
However, in light of higher valuations, we have recently reduced the risk in portfolios slightly and tweaked some allocations. In particular, with interest rates now resuming an upward path and sterling recovering lost ground, we have modified our bond exposure in portfolios, increasing corporate bonds at the expense of gilts, high quality government and global bonds. We have reduced slightly our exposure to high yield bonds after a strong run, preferring instead emerging market bonds.
With equities, after strong gains this year, we have reduced slightly our US exposure, particularly technology focused NASDAQ, preferring instead more diversified global equities. To take some risk off the table and diversify equities, a small holding in commercial property has been initiated. We have also increased our weighting in value-based equities, which are companies which are somewhat unloved by the market, but have intrinsic value and lower valuations. In terms of the Adventurous portfolio, we have promoted China at the expense of India to target growth and switched some of the NASDAQ holding into a new fund focused on artificial intelligence and robotics.
Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk