Doing nicely

The upturn in economic growth, benign central banks and improving corporate fundamentals have all ensured that most asset classes are set to finish 2017 in positive territory. But will the good times last?

In the view of Pictet Wealth Management’s (PWM) chief investment manager, Cesar Perez Ruiz, next year “currently looks set to be a case of more of the same, at least in the first half”. After nine years, the rally in developed-market equities has certainly matured and valuations are high but “solid fundamentals mean equities still have room to run” in Perez’s view. But there may well be an increase in volatility from this year’s very low levels, especially in view of political and geopolitical instability, writes Perez, while “the gradual withdrawal of liquidity support by central banks is worth watching”.

Christophe Donay, PWM’s chief strategist, also has concerns about central banks. Donay writes that their accommodative policies since the financial crisis have not been enough “to generate sufficient levels of growth and inflation to warrant anything more than a very cautious approach to policy normalisation”. He argues that the limitations that central banks are coming up against “may be because their policy framework is inadequate for the challenges that arise from rampant globalisation and successive waves of technological innovation”. To deal with these challenges, Donay suggests a new ‘style’ of monetary policy might be required, “one that involves anything from setting flexible inflation targets to defining asset-price targets and fixing goals for nominal GDP”.

But these concerns cannot conceal that this has been a very good year for most regions, with a European economy that has performed much better than expected and the continued success of Abenomics in Japan, even in terms of structural reform. The rest of Asia too has been putting in a robust performance. This is reflected in Asian stock indices, which have been among the strongest anywhere this year—reason enough for adopting “an active, selective approach to an extremely dynamic corporate scene”, according to David Gaud, PWM Asia’s chief investment officer. While Asian indices have long owed their performance to tech names, Gaud says that evidence that health returns are now coming from a much wider range of sections is “an important argument for including Asian equities in any portfolio diversification strategy”.

This year is also shaping up to be a turning point for hedge funds, according to Heinrich Merz, head of hedge funds at Pictet Alternative Advisors. Performance in recent years has been impacted by low volatility and correlations that, until recently, have remained “stubbornly high”. But Merz is confident that central banks’ gradual withdrawal from quantitative easing “translates to higher volatility, corrections of inefficiencies, the reversal of capital misallocations and, concurrently, greater alpha”. His own assessment of hedge funds’ performance this year is that “it does not take much policy normalisation for alpha to rebound strongly”.