M&G fund managers: 2018 outlook

by | Dec 28, 2017

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M&G Investments

Fund managers from across M&G have shared with IFA Magazine a series of short pieces setting out their own reflections and thoughts around possible challenges and opportunities in 2018.

Graham Mason, Chief Investment Officer at M&G Investments, told us: “So far in 2017, there has been continued ‘normalisation’ of interest rates in the US, surprisingly low inflation in most parts of the world, and the continued dominance of tech companies in US equity returns. At the same time, despite the range of potentially significant events this year including tensions in North Korea, South Africa and Catalonia, there has been relative calm and positive returns seen in many asset classes.

“Looking ahead, 2018 will bring a new chairman of the Federal Reserve, elections in Mexico, Colombia and Brazil, ongoing NAFTA and Brexit negotiations, and a range of events that we cannot predict today.

 

“Perhaps most important for investors is whether the synchronised economic growth we have seen around the world is sustainable and whether inflation will remain subdued. Despite equity markets hitting new highs, market commentary and valuations across asset classes suggest significant scepticism about the longer term health of the world economy. The way these dynamics progress (both growth itself, and perceptions of it) will play a key part in shaping investment returns over the next twelve months.”

Steven Andrew, Multi-asset Fund Manager, M&G Investments, highlights the case for looking for opportunities where market price behaviour exhibits a strong ‘Brexit‘ effect, rather than trying to predict a particular outcome: “Reflecting on the year ahead, it is impossible not to talk about Brexit – especially today when Theresa May heads to Brussels for a crunch-time meeting with Jean Claude Junker. Will there be more clarity around the divorce bill and how to solve the Irish border issue? Brexit throws up lots of questions about the economic, political and social future of the UK’s relationship with the rest of the world and markets await further clarity with anticipation.

“For investors, dealing with such uncertainty means identifying the pertinent facts and assessing them in the context of asset price behaviour – what’s ‘priced-in’.  In this respect, the important economic question on Brexit is not ‘what does the future trade agreement look like?’  The pertinent question is, ‘how different will it be from what we are used to?’ This is both an impossible and an easy question to answer.

 

“Impossible in that we won’t know the specifics for a long while yet – and even when we do it will be very difficult to judge the impact.  Easy in that we can answer in the way we would approach any other uncertainty: by looking for evidence and judging probabilities based on observable facts.

“UK administrations since the 1980s have consistently favoured participating in global trade and, albeit by varying degrees, in the global market for labour and capital.  Despite the popular vote to leave the EU, there is no evidence to suggest it is part of an ideological shift away from open markets in favour of closed ones.   In a broad sense, this suggests that, whatever the outcome of the negotiations with the EU – and indeed in the subsequent trade talks with everybody else – the ultimate differences are more likely to be ones of emphasis and detail rather than of regime.  And in that sense, the easy answer to our ‘pertinent question’ is, for the aggregate economy, ‘probably not all that different’.

“Of course, we mustn’t forget how little we can actually know.  Rather than take a strong view – and investment position – either way, contingent on a particular outcome, we should continue to look for opportunities where market price behaviour exhibits a strong ‘Brexit effect’.  This way, we can seek to exploit the market’s craving for certainty while trying to resist our own, which is something I will be focusing on next year.”

 

Tom Dobell, manager of the M&G Recovery Fund, explains why the UK is in a lot better shape than headlines would have us believe: “At this time of year families and friends come together to enjoy the festivities or reflect on what may have been a difficult year. Families, like businesses and countries, go through highs and lows as they face various challenges.

“For example, if media headlines are to be believed, ‘UK plc’ is currently in a pretty bad state, experiencing difficulties and being out of favour with investors. In fact if UK plc was a company its ‘price’ would be languishing in the bargain basement reflecting little or no belief in its potential for recovery. The country faces uncertainty and difficulties over the precise details of the future relationship between the UK and the European Union, as well as concern about the future growth of the economy, post Brexit. At the stock market level, this uncertainty is reflected in a higher earnings yield, compensating investors for taking on a higher level of risk.

“Yet the indications are that the UK is in a lot better shape than those headlines would have us believe. The manufacturing sector’s performance is improving, export order books are booming and the overall profitability of UK-listed companies is increasing. The corporate sector is benefiting from a more competitive level of sterling and the growth in corporate profits is broadly based. In addition, UK companies are very international, earning around 70% of their revenues overseas, with the weaker pound a welcome tailwind. Takeover activity is also picking up with notable interest in the UK from foreign investors.

 

“The UK is home to some fantastic companies operating within a strong corporate governance and legal framework. I believe in taking a contrarian view, ignoring the short-term noise and taking advantage of the mispriced risk to invest in some great opportunities. The UK is rather like a vintage wine that’s been in the cellar for a while – it’s ready to be shared at the Christmas table, but there aren’t many who are keen to join us!”

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