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Navigating through the winds of change
(Part 1)


windsofchange1

How will US Fed rate hikes affect yields? What strategies should investors adopt during these times of uncertainties? Find some of these answers in part one of a market commentary with our fund partners who shared their views on market expectations as well as opportunities and risks that investors should look out for.

Navigate turbulent markets with diversified multi-asset portfolios by Aberdeen Standard Investments

1) What should investors pay attention to at the moment?

The recent tech-induced sell-off has been a timely reminder that volatility remains a feature in stock markets. Fears of an impending crash may be overblown, considering macroeconomic indicators continue to point to better growth and corporate earnings have largely been on the uptick. Yet it remains important to keep an eye on risks: Central bankers could defy market expectations, Trump’s protectionist stance and trade sparring with China could be further amplified. Europe could slide back into stagnation as populism gains traction, and China’s rush to revert to old ways of governing may stunt its economic evolution. Despite these uncertainties, we retain conviction in our fundamentals-focused investment process, keeping a keen eye out for companies with robust balance sheets and good cash flow that can stay resilient in the long term.

2) How aggressive will US Fed hike rates for this year?

Central banks around the world are preparing to tighten monetary policy, with the US Federal Reserve leading the way. Not so long ago, inflation in the US seemed like a remote risk, but price rises have been accelerating and now the prospect of the central bank acting more aggressively doesn’t appear so unrealistic. Our current view is for four US interest rate-hikes this year, with a further three in 2019. If this were to be the case, an extraordinary era of easy money would finally be over. The implications are not as clear as they may have once been. These are unconventional times and the dollar remains stubbornly weak despite forecasts for more US rate hikes over the next seven quarters. A weak dollar is good for emerging markets because assets in the developing world look relatively more attractive. While tighter monetary conditions will be a drag on global growth, less liquidity in the financial system will go some way towards addressing some of the market distortions following a decade of quantitative easing.

3) Since markets have been pretty volatile lately, what investment strategy should investors adopt in 2018?

Some investors seek to time the markets, while others invest in complex derivatives using hedge-fund techniques to generate alpha. Both rely heavily on fund manager skill, which by no means are guaranteed. At Aberdeen Standard Investments, we believe genuine diversification is a better starting point to navigate current market conditions. Our diversified multi asset portfolios invest in up to 25 asset classes directly across developed and emerging markets, traditional and higher yielding fixed income and liquid alternatives. By making broader use of asset classes, we build funds to meet investment goals and withstand external shocks. Investors can use them as all-in-one solutions.

Capture growth in the age of disruption by Lion Global Investors

1. Why should investors consider investing into disruptive innovation?

What many investors have yet to realise is disruptive innovation is already entrenched in our lives. From the AIs that are already integrated in our daily activities to the rising adoption of electric vehicles. And yet, one of the world’s savviest investors, Warren Buffett, only started investing in companies such as Apple only last year. So firstly the trend is still at its early stage and there is still more growth to come. The second point is in a slow growth world, disruption is driving growth. Companies such as Alibaba and Amazon are growing revenue at a faster pace than the broader market at more than 40% revenue growth in the first quarter of 2018.

2. What sectors should investors continue to allocate to?

In the current environment, we know the world’s growth is moderating while rates are rising. In this environment, it would be difficult for bonds to generate the return of the previous years where the tailwind of falling rates boosted returns. Similarly, in equities, sectors and companies that are growing faster than the industry or the market are sensible considerations. From the disruptive innovation perspective, in every industry there will be leaders and laggards – what we’ve seen is companies that are able to leverage on disruption to drive growth are more likely to lead than lag.

3. How will US Fed rate hikes affect yields?

Fed rate hikes, and the anticipation by market participants, is leading to rate volatility, which has contributed to muted returns in the first quarter of 2018 for bond markets. What is worth pointing out is that for bond investors with a reasonable time horizon, rising rates are gradually absorbed by bond markets, and new issuance in the market will have higher yields to reflect higher rates. This is provided rate hikes are gradual and bond markets are given time to price in rate hikes into new issuance. The risk is that central banks hike rates sharply or in a disorderly manner, which would cause sharper volatility in bond markets.

4. Since markets have been pretty volatile lately, what investment strategy should investors adopt in 2018?

Investors should remain watchful for opportunities that bouts of market weakness. In an environment where leading indicators are expansionary, growth data remains modest and positive, and inflation is under control, taking on a measure of equity risk in their portfolios is a sensible thing to do. With costs a key factor determining the net return of any investment, investors should also keep in mind the expense of any investment, such that it does not overwhelm what the investment can potentially return.

Find value and investment opportunities in the Emerging Markets by Schroders

1) What opportunities are there in the Emerging Market?

Generally, global growth appears relatively well supported, despite some signs of moderation in momentum. The outlook for emerging growth remains positive, though we expect modest deceleration in the pace of economic growth in China, from a high level.

We have recently added exposure to Poland as the outlook for economic growth is robust and we have identified a number of strong bottom-up opportunities.

In Hungary, the macroeconomic environment remains supportive and valuations are reasonable.

In South Korea, geopolitical and trade risks are ongoing. However, the market offers attractive valuations and corporate governance continues to improve.

In Russia, the latest US sanctions have likely lifted the risk premium for the Russian market on a sustained basis but the gradual economic rebound should remain intact and valuations look cheap, especially after the recent sell-off.

In Greece, economic recovery is ongoing and valuations are attractive.

We are currently finding strong bottom-up ideas in the non-core markets, notably China but also South Africa and Brazil. We have also identified opportunities in Pakistan and Egypt.

2) What sectors should investors continue to allocate to?

Whilst we do adopt a top-down view when it comes to allocation to certain geographical markets, we select the underlying holdings via a bottom-up stock selection process.

We currently have a positive view on technology related companies, such as Samsung SDI and video game publisher NCsoft which rebounded following recent weakness. Samsung SDI also benefited from an improvement in the outlook for OLED while NCsoft saw ongoing strength in Lineage M revenues.

3) How will US Fed rate hikes affect yields?

As expected, the Federal Reserve (Fed) raised interest rates by 25 basis points at the March Federal Open Market Committee (FOMC) meeting. The move increases the target range for the federal funds rate from 1.25%-1.5% to 1.5-1.75%.

We expect the Fed to raise rates another three times this year and twice in 2019 to take the policy rate to 3% (previously 2.5%).

The global economy is decisively moving from the recovery phase of the economy cycle to the expansion phase. The transition occurs as most countries start to experience shortages in spare capacity, causing firms to bid-up input prices including wages, which in turn drive demand higher. As a result, inflation is typically higher, prompting central banks to tighten monetary policy. Bond yields tend to rise during this phase of the cycle as investors demand additional compensation not only for rising inflation, but also the higher potential returns on equities, driven by strong economic growth.

4) Since markets have been pretty volatile lately, what investment strategy should investors adopt in 2018?

All in all, we are very conscious that we are in the late stages of the cycle and market prices have moved to reflect a lot of our views: US and Emerging market equities have outperformed, the dollar has weakened and the Japanese yen and emerging market currencies have strengthened.

We cannot afford to be complacent and have therefore increased diversification in our portfolios across asset classes. Based on our indicators, the traffic light is still green but expensive valuations pose a speed limit to returns and we have shifted our strategy down a gear.


With these insights and strategies from Aberdeen, Lion Global Investors and Schroders, consider taking the next step to find out which funds can work for your portfolio. Simply search for the funds you want on dollarDEX using our Fund Finder to get started!

All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

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Information is correct as of 01/06/2018.