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2018 – key investment themes from 7IM  

28 December 2017

2017 has been a record breaking year for equities, not least in US markets. If the S&P 500 sticks to tradition, and finishes December up (in true ‘Santa Rally’ style), 2017 will be the first calendar year in its history with no negative months, according to Seven Investment Management (7IM). Here members of the firm’s investment team offer their views on potential themes for the new year.

1. Passive becomes the ‘Despicable Me’ of investments

Peter Sleep, senior investment manager, said: “2017 was the year that passive investing become, perhaps more than ever, the ‘Despicable Me’ of the investment world. They were seen as gradually taking over the world and driving growth stocks higher.

“But with the majority of ETFs being market cap weighted, it is simplistic to blame passives for the direction of the market. As for next year, whilst ETFs are becoming increasingly specialised in what they offer, from robotics, ageing and millennials, newer themes look likely to be variations on income, ESG and batteries.”

2. Equity managers may need to work harder in 2018

Damian Barry, senior investment manager added that stock markets had already started to see a modest rotation away from growth stocks in December in favour of value. “This may well continue as a theme in 2018. Will value investing be the comeback kid of 2018? It’s too early to tell, but it’s hard to believe that the market will continue to be as narrowly led by FAANG stocks (Facebook, Amazon, Alphabet, Netflix) as in 2017.

“We are increasing the allocation to active managers in our multi-manager funds and will continue to look at managers that are conviction led, and focused on improving company fundamentals.

Whilst the global economy looks relatively benign, we see pockets of value here and there. 7IM continue to hold some assets in cash for the time being, ready to deploy when an opportunity presents itself. As central banks withdraw the punchbowl of liquidity, this may be the catalyst for active managers to deliver stronger outperformance in 2018.”

3. ESG – Gender equality and social housing

Camilla Ritchie, who leads on the 7IM Sustainable Balance Fund said: “A key ESG theme to watch out for in 2018 could be gender equality and we have already seen a recent launch – the Lyxor Global Gender Equality ETF, with the apt ticker ‘elle’, meaning ‘she.’ Gender Equality is the UN’s fifth sustainable development goal and I would expect more choice to develop to meet this theme. With 6 February set to mark 100 years since women got the vote in the UK, it would be timely – not to mention overdue.

“We have seen a number investment company launches addressing affordable housing, and we saw the first launch in this space towards the end of last year. I wouldn’t be surprised to see more launches such as these in 2018 as local authorities and housing associations increase their building programmes.”

4. How to diversify when most asset classes have gone up? 

Alex Scott, chief strategist, said: “Equities and bonds are looking relatively expensive at the same time – something of a historical anomaly at a time when other asset classes more broadly have also gone up. So, as we head towards a New Year, one of the key questions for multi-asset managers and investors alike is perhaps the issue of how do you adequately diversify portfolios? The days when it was as simple as buying government bonds are long gone.

“Alternatives have been a key way to look outside the box, but this needs to be handled with care. Not all alternatives can be viewed as ‘uncorrelated assets’ – real estate is a case in point. We think a number of real estate funds are too exposed to the UK economy, but for many this is where the list of potential alternatives stops.

“We don’t think there is a single alternative asset class that is the panacea to the problems of government bonds in the current environment. We think a mix of alternative asset classes, combined with solid risk management (that is especially important in this area) is one solution.”

 

 

 

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