Must-read themes for investors to ponder this summer

The holiday season is a time for relaxation, but it is also an ideal opportunity to ponder key investment themes that could boost your wealth. In this feature, Thomas Becket, Chief Investment Officer at Psigma Investment Management, sums up summer trends investors could usefully discuss with their advisers.

When I last wrote this piece almost two years ago, markets were suffering their latest bout of jitters, with the oil price slumping, concerns over Greece’s finances and the risk of a Chinese “hard-landing” being the fuel to another volatile few weeks. Fast-forward to today and investors have not only forgotten these concerns but also brushed aside the UK opting to leave the European Union, embraced Donald Trump as the saviour of the US and watched as the French political establishment has fallen by the wayside. All of this whilst a swathe of markets have repeatedly found new all-time highs.

The global economy

Our thoughts on the future path of global GDP have changed little over the past few years, with “solid, but unspectacular” fast becoming our motto, as we continue to see global growth in and around the 3% marker. Unsurprisingly, the focus remains on Trump’s ability to “make America great again” being a determining factor of GDP growth surprising in either direction. His pre-election promises to bolster economic growth to over 4% per year and create 25m new jobs certainly would move the needle higher. However, early signs have disappointed, with the first quarter of the year seeing the worst growth reading in three years, backed by stalling industrial production and retail sales data. Optimists would argue for more time, citing ‘soft’ confidence data indicating a brighter trajectory for the remainder of the year. Our view is that the Q1 data is somewhat of a blip, with growth picking up moderately as the year progresses, although falling noticeably short of President Trump’s optimistic target.

Chinese GDP growth of around 6.5% remains a key pillar in achieving strong global growth, with China accounting for around a third of global GDP growth in 2016 (Add a resurgent India to the fold, and the two Asian giants could contribute more than half of global growth this year). Our view had been that 2017 would be a solid year, given the 19^th Party Congress in November and a desire from Chinese authorities to keep things ticking along nicely with as little disturbance as possible.  However, concerns are beginning to creep in, with weaker activity data and worries over excessive credit growth cueing the authorities to tighten monetary policy.

Elsewhere, Europe has seen a surprisingly strong start to the year as it recovers from years of lost growth. Undoubtedly the efforts of Mario Draghi and the ECB have helped push growth higher, but with the proverbial “kitchen sink” well and truly thrown at it, the ability to keep growth at current levels seems somewhat optimistic. Meanwhile back over the Channel, the UK appears to have been treading water since our decision to leave the European Union. Rising inflation and stagnating wage growth have cemented our view of low, yet positive growth.

In summary, our expectation of solid growth in 2017 seems realistic despite a handful of factors muddying the picture somewhat, with most regions providing good reasons to beat expectations but equal justification to underwhelm.

Psigma’s core investment themes:

• The hunt for yield

We believe it is still too early to call the end of the bond bull market, but we are certainly becoming more cautious on the asset class. Some selective fixed income still appears attractive, such as short-duration credit and European asset-backed securities. Our ability to create bespoke solutions in this asset class has been greatly beneficial, altering what may appear to be a precarious asset class, to one where we are in control and have a greater level of transparency and predictability.

• Thematic equity increasingly important

Thematic investments (where we deploy a top-down investment approach, focused on broader, macroeconomic themes) have become an increasingly important part of our portfolios over the past few years. We have worked hard to identify areas of the market where we feel there is underappreciated value and have found a good level of success in doing so.

An example of this would be the healthcare sector, where we built a position in the Polar Capital Healthcare Blue Chip fund last year after some lacklustre performance amongst the political noise. The long-term story of an ageing global population and rising healthcare costs remains strong, and our resolve has already seen rewards this year, with the sector making some overdue headway.

• Asian consumption marches on

Another long-term theme that we like is the evolution of the Asian consumer: the story of emerging economies rebalancing away from manufacturing towards a more tertiary-based market. The potential growth in this area is mind boggling, with tens of millions of additional people looking to travel, becoming more health conscious and generally desiring a more western lifestyle.

In a similar vein to healthcare, we used a period of underperformance in 2016 to reload on a theme where we have particular conviction and added the Macquarie Asian All Stars fund to our portfolios in January of this year.

• High-conviction on Japanese equity

This has been a mainstay in our portfolios for the past number of years and we are particularly bullish on the corporate reform theme taking place. Despite naysayers suggesting progress is too slow, we feel this is a multi-year theme and when combined with reasonable relative valuations, the opportunity is amongst our strongest conviction ideas. We still believe Japanese equities are broadly under-owned and as other investors latch onto the idea that Japan may finally be making positive steps, we feel a strong tailwind may be forthcoming to the region.

In Summary: Stay nimble and seek opportunities (Carefully)

Whilst we have emerged unscathed through the other side of an event-filled twelve months, we remain vigilant of the ever-changing global environment we find ourselves in. Our broadly neutral stance across our investment strategies, accompanied by a conviction in those investments that we think have the best growth potential in the future, seems appropriate at this time.

Additionally, at the current juncture, we have plenty of cash on the sidelines and our fluid and proactive investment approach has allowed us to take profits consistently over the last year. Opportunities to reinvest some of the proceeds will come and go and market timing is notoriously difficult, but we take heed of the fact the average intra-year drop in the S&P 500 is an astonishing 14.1%. Our cash arsenal that we have amassed should allow us to move quickly when the environment dictates it necessary.

Your next steps

This piece sets out a wealth of investment ideas that you might like to consider for your own investment portfolio. However, applying them requires careful consideration of factors like your existing assets/liabilties, risk-profile and objectives, making professional advice a must. To start the process of meeting precisely the right wealth managers for your needs, put our smart online tool to work here.