After an exceptional year…
2017 was an exceptional vintage for risk assets that will be hard to repeat this year. But the environment could become increasingly favourable for active management as challenges rise and volatility increases. This is one of the main messages from Pictet Wealth Management (PWM) analysts and strategists featured in the 2018 special edition of Perspectives.
What might some of those challenges be? Global strategist Alexandre Tavazzi details a number of “known unknowns” ranging from geopolitical shocks to interest rate surprises and liquidity shortages that could upset the apple cart. Although Tavazzi acknowledges that “the biggest shocks to markets often come from unexpected directions”, at least investors can guard against the risks we are able to identify.
PWM’s Chief Investment Officer, Cesar Perez Ruiz, admits that as time goes on and risk assets maintain their strong momentum, “there is even less scope for things to go wrong”. Along with the risks underlined by Tavazzi, he points to the risk that central banks are forced to tighten policy more aggressively than is being expected should inflation pick up. “Markets are too complacent about this risk,” says Perez.
But Perez still considers that strong fundamentals should mean 2018 is “another year when it pays to stay invested, while being more tactical”. Among his key recommendations are to: stay positive on equities; be short duration on sovereign bonds; prefer quality in credit, favour alternative investments; diversify away from the dollar, and; take advantage of volatility spikes.
A note of optimism, at least for the macroeconomic environment, is struck by PWM’s Head of Asset Allocation & Macro Research, Christophe Donay, who believes the US tax cuts passed at the end of last year could well shift the trajectory of growth (and inflation) in the world’s largest economy. The fiscal boost came just at the right time, according to Donay, “just as the momentum provided by monetary policy is turning into a monetary drag”. Helped by strong, synchronised growth and corporate earnings, equities “could well continue to be the main source of positive returns for investors in 2018”, he writes, whereas the risk of higher inflation “diminishes further the attractiveness of government bonds”.
Corporate earnings are the focus of a series of articles by Senior Cross-Asset Strategist Jacques Henry, who highlights the huge rise in expected returns for US corporations as a result of the tax cuts. The rise is broad-based, writes Henry, easing concerns that earnings growth was becoming concentrated in only a handful of sectors. But expected earnings are also climbing elsewhere. Stocks in the euro area “could deliver double-digit total returns this year”, according to Henry, while the Bank of Japan’s support means that “the outlook for Japanese earnings still looks pretty strong”.
But equities may not be the only asset class with good prospects. Jean-Damien Marie, Head of Alternative Investment Solutions at Pictet Alternative Advisors (PAA), argues that alternative investments will play an ever-increasing role in portfolios as antidotes are sought to the “lacklustre return expectations for classic 60/40 equity/fixed income portfolios” in the coming years, while Heinrich Merz, Head of Hedge Funds at PAA believes that increasing volatility and return dispersion across asset classes is a boon for hedge funds, with the environment becoming “increasingly propitious for alpha generation”.