Our Outlook: Key themes for 2018

By: Andrew Duncan


Global market outlook

2017 was a strong year, spread broadly across most global industry sectors. In particular, some of the more highly-valued, “growth” sectors have outperformed the wider market. This has been seen most notably in the technology sector, which has been boosted by robust economic growth around the world, low inflation, and low bond yields. Looking into 2018, we think changes in expectations around interest rate policy, bond yields and the reversal in QE could drive outperformance in some of the laggards from 2017.

With this in mind, we continue to seek to ensure fund portfolios are diversified across different investment styles. A good example of this is the Majedie UK Income Fund, which uses a contrarian approach to stock selection, leading to a portfolio that looks quite different from the broader index and sector peers.

On a geographic basis, despite strong performance in Asia-Pacific and emerging markets in the last year, we continue to like markets such as India and China, where cyclically-adjusted PE ratios are trading below developed markets. Technological advances are fundamentally changing the consumer landscape in these countries, driving future growth. We believe the Newton Global Emerging Markets Fund is well positioned to benefit from some of these trends.

Equity themes

We continue to like the theme of electronic payments over the next few years. In traditional payment systems, we still see a shift from cash to electronic payments, driven by growth in ecommerce and new mobile payment systems. We remain buyers of Visa, as one of the leading traditional global payments platforms, due to its ability to connect millions of merchants with billions of cardholders globally. In addition, we like Paypal for its exposure to the rapid growth in e-commerce, by offering safe and secure payments online. In emerging markets, we have seen mobile payments technology leapfrog the developed market systems, with companies such as Tencent offering online and offline payments through smartphones.

Turning to the healthcare industry, we are seeing what we believe to be an unsustainable rise in global healthcare costs. This has been driven by a number of factors, such as increased life expectancy, higher treatment costs, and the growth in chronic diseases. To combat this, healthcare payers have begun a shift towards outcomes-based healthcare, whereby the healthcare providers and payers are financially incentivised to work together to lower treatment costs and improve patient outcomes. One of our favoured ways to play this theme is UnitedHealth Group, which is able to analyse tens of millions of patient records and medical claims, pinpointing cost-effective treatments and strategies to lower medical costs.

Finally, we think the global car industry is seeing more disruption in the next decade than any other industry. Increased consumer demand and greater regulation around emissions is forcing traditional car companies to embrace electric vehicle (EV) technology in the future. Whilst we are unsure as to which car manufacturers will emerge as winners in the next five to ten years, we see strong demand for raw materials used in EVs. In particular, significant amounts of copper will be used inside the car and in charging infrastructure, with nickel and cobalt being major components inside batteries.

Alternative asset themes

Whilst we retain a constructive stance on equity markets, the current upswing in the global business cycle is now over eight years, at the longer end of historical norms. With ongoing uncertainty around Brexit negotiations in Europe, policy implementation issues in the US, and risks of military activity in North Korea, we remain on the lookout for assets that have low correlation with equity markets. A good example of this is the CG Absolute Return Fund, which is defensively positioned with a view to protecting capital, with positions in index-linked government bonds, property, and infrastructure. We believe exposure to these assets can provide useful ballast within portfolios.