Note: This article originally appeared in Billionaire on Apr 30, 2018 titled, “Will 2018 be a red-letter year for investors?”
Nobel prize-winning economist Paul Samuelson once said that investing should be like watching paint dry or grass grow adding that if you want excitement you should go to Las Vegas.
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The markets have been a lot more like Vegas so far this year but the underlying principle of taking a long-term view, managing risk, and investing in solid fundamentals (at the right price) should underpin every portfolio.
Having said that, 2018 is turning into an interesting year for investors. Here are the seven key themes I think investors should be watching closely.
A sustained Trump effect
This headline may provoke déjà vu among those who read my 2017 investment outlook but twelve months later President Trump has confounded his critics, on the economic front at least.
Unemployment is low, the economy is growing and the financial markets have performed well. We are only now beginning to see the effects of tax cuts trickling down in the real economy but importantly inflation remains under control. The Fed, under new Chair Jay Powell, has indicated a clear path of three interest rate hikes this year.
If politics is all about the economy then regardless of the ongoing drama in the White House, Donald Trump heads to the mid-terms later this year with a significant tailwind in his favour. We remain bullish on the US.
Beware the headline effect
One aspect of the Trump administration that has been interesting to observe has been trade policy. After tearing up the TPP the Trump administration appears, on the surface, to have ignited trade wars with several of the United States’ key trading partners, most notably China.
In reality the markets are beginning to understand and interpret the President’s strategy of going in hard and agreeing a negotiated outcome. We’ve seen this in discussions with Mexico, Canada, Japan and most recently South Korea. Investors are beginning to look beyond the ‘headline risk’ to what the outcome is likely to be and identifying the investment opportunities presented. This will become increasingly important as the Trump administration nears some kind of settlement with China and turns its attention to another big trading partner – Europe.
Volatility has returned to the market
2017 was remarkable for low volatility which limited trading opportunities for professional investors. That situation has somewhat reversed in 2018. The VIX has jumped over 80% in the first quarter in part driven by the trade war rhetoric and concerns about the US economy (and potential manipulation of the index itself). Interesting to note that during the recent sell-offs in the market, institutional investors were content to largely sit on the sidelines.
This market environment creates attractive buying opportunities but it also favours a selective, actively managed approach.
China flexes its muscles
Trade wars aside, some interesting questions continue to hang over the Chinese economy. Will China manage to unwind its debt and how will the “belt and road” trade infrastructure programme unfold.
On the former, our view is that the Chinese have enough levers to manage an unwind in debt in an orderly fashion. The announcement that the Bloomberg Barclays Global Aggregate Index will add nearly 5.5% exposure to Chinese bonds starting next year is a positive development that should theoretically provide some liquidity to the Chinese market.
Belt and road also presents opportunities. Two years ago you might have speculated on Mexican cement producers in anticipation of President Trump’s wall between the U.S. and Mexico. Today Chinese suppliers to belt and road projects, including cement manufacturers, are worth a closer look.
Fed rate hike forcing a re-think on REITs
Investors continue to be on the hunt for yield to meet the growing income obligations of the baby boomer generation in retirement. Over the past few years, Real Estate Investment Trusts (REITs) have been a popular source of yield for investors. However, in an environment where interest rates are inevitably rising, the increase in borrowing costs will negatively impact the performance of most REITs.
This is even more the case for those exposed to the retail sector in South East Asia and Australia where the entrance of e-commerce players, notably Amazon, raises an ominous shadow over traditional retail players. E-commerce is changing the way retail operates and the face of commercial property. Warehousing and logistics are where many investors are turning for opportunities.
We continue to see some interesting developments in the digital and tech economies. While Facebook and more ‘traditional’ tech companies face increasing scrutiny and oversight over personal data protection, the “fourth industrial age” is beginning to shine through in areas such as Artificial Intelligence, machine learning, 3D Printing and the internet of things. This is absolutely the case in our own industry of wealth management. We are working on interesting ways to incorporate AI and machine learning into our own digital investment platform CONNECT by Crossbridge.
We are also watching blockchain very closely. As regulators begin to address the market, adoption is shifting from early crypto-currency enthusiasts to a small but growing number of institutional players entering the market.
At the start of 2017 almost nobody would have predicted that Donald Trump and Kim Jong-un would meet for peace talks. After the startling rhetoric and subsequent thawing in relations during the Winter Olympics the signs are extremely encouraging. The anticipation is that North Korea is looking back to its economy rather than military ambitions. If North Korea is genuine, the peace dividend could be one that all of Asia will enjoy.
2018 may well go down as a red-letter year.
Charlie O’Flaherty is partner — head of digital strategy and distribution at Crossbridge Capital. The views expressed in this article are those of the author and not the author’s company. This material is provided for educational purposes and should not be construed as investment advice or an offer or solicitation to buy or sell certain securities.