We combine deep qualitative analysis by our team of investment specialists with powerful quantitative analysis from our proprietary software to inform an unconstrained approach for strong, risk-adjusted returns.
Investors have become more complacent. It’s been happening for well over a year and it’s easy to see why.
Passive investing and central banks have been distorting the volatility structure, cyclically- adjusted multiples continue to reach new highs, and bitcoin and other crypto-stories have lured investors of all background into a 21st century tulip mania. Despite the doomsayers, the world is still growing strong. Job markets are flourishing and the consumer based capitalist model looks in good shape for the risk-on mode to continue this year.
We believe that tax reform will boost domestic demand, improve SME income statements and trigger capital repatriation.
2018 starts off on a strong footing, with synchronised global growth, robust consumer demand and a gentle pace of withdrawal from the ultra-accommodative monetary policy by the major central banks. In the US, we believe that tax reform will boost domestic demand, improve SME income statements, trigger capital repatriation, and further boost company valuations sending the S&P 500 above 3,000 (a 12 per cent from 2017 close). A similar picture is expected for Europe despite euro strength, as the improving consumer and trade conditions boost Europe’s usual suspects (Germany, France) and revitalised growth puts the former PIGS (Greece, Spain) back in the picture.
The ultra-accommodative policies are coming to a crucial stage with many central banks either normalising rates or considering steps for a gentle withdrawal. This at a time when core rates are at their lowest levels and corporate spreads super tight. Under normal conditions and within this global macroeconomic context, fixed income investors would have been running for the exit but benign inflation and central banks dominance in all fixed income segments keep them calm. Inflation remains a mystery not only in the US but in all major – and even in some emerging – market economies. With inflation the canary in the fixed income mine, any sudden increase will have devastating effects. This situation creates an asymmetric payoff and reinforces our negative view on global rates.
As we move deeper into the expanded business cycle, asset allocation and portfolio construction questions become critical.
The ongoing isolationist US administration policies will prevent the US dollar reaching last year’s highs. The ‘stability’ premium that the dollar has been enjoying over the last years seems to be at risk. Instead, the euro, commodities and emerging markets are expected to shine in the year ahead.
As we move deeper into the expanded business cycle, asset allocation and portfolio construction questions become critical. The smart investor portfolio should be more active than passive, more single line focused than ETF or fund focused, more thematic than ‘sterile’, and more multi asset than the good old “60-40”.
We expect 2018 to be not just another fruitful year but a turning point – as equity markets rise for a final year on double digit returns and rates normalisation gains pace.
The modern portfolio construction is a Lego structure with directional and market neutral positions, across assets and across frequencies. The proliferation of quantitative strategies, and easy access to new products, enables investors to become more sophisticated. Hedge funds will continue to struggle to justify their fees and hedge fund replication strategies stand to be cheaper, better alternatives instead. We believe that asset managers need to offer their clients active, cost efficient, multi-asset solutions away from multi-layered fund structures that increase total expense ratios.
We expect 2018 to be not just another fruitful year but a turning point – as equity markets rise for a final year on double digit returns and rates normalisation gains pace. With this in mind, our latest quarterly outlook offers insights that are independent, proactive, and – crucially – readily actionable.
Enjoy the read and happy new year!
FOR PROFESSIONAL INVESTORS ONLY