Fund managers examine the 2018 outlook in a series of interviews with Lipper Alpha Insight on topics ranging from emerging markets to interest rate expectations and inflation.
During the course of 2017, Jake Moeller, Head of Lipper UK & Ireland Research, has spoken in depth to 23 fund managers on a wide range of issues and concerns.
We heard about some of their hopes and fears in a previous blog post in September, when Brexit, fintech disruption and the growth of passive investing were among the subjects.
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As we begin 2018, what did fund managers have to say about the challenges they expect to face in the year ahead?
Fund managers and the macro-economic outlook
Anujeet Sareen, Fixed Income Portfolio Manager at Brandywine Global, told Jake about some of the reasons for optimism in the United States, Europe and the UK.
Listen — Fund Manager Chat: Anujeet Sareen – Brandywine Global
He thinks these economies are now over the worst of the global financial crisis and are likely to grow somewhat better and more sustainably in the quarters ahead.
Sareen said: “The banking systems in these regions have done quite a bit of work in repairing their balance sheets.
“It is also noteworthy that the U.S. household sector has deleveraged substantially and is in a much healthier position to prolong this cycle.”
Peter Fitzgerald, Global Head of Multi-Assets at Aviva Investors, is chiefly concerned with low levels of interest rates and bond yields in an environment where global growth is picking up.
He said: “The question that every investor should ask themselves is what could happen to their portfolios if the U.S. Federal Reserve and other global central banks were to continue to raise rates?”
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James Baker, Fund Manager of the Chelverton UK Equity Growth Fund, adds that geopolitical uncertainty and the interest rate environment will be among the chief concerns this year.
Listen — Fund Manager Chat: James Baker, Chelverton UK Equity Growth Fund
Are investors understating the risk of inflation?
Fitzgerald is worried that many investors don’t see inflation on the horizon at all.
He said: “If anything we would say people are being very complacent about the potential for inflation to reappear.
So when you look at bond markets, when you look at some of the inflation markets, they are priced more for a deflationary world than one where growth continues to accelerate.
We continuously get questioned about why inflation is so low. We suspect inflation is starting to turn, it is starting to pick up. There are ways that you can protect your portfolio.”
Listen — Fund Manager Chat: Peter Fitzgerald – Aviva Investors
What is driving the popularity of emerging markets?
Emerging markets saw a positive performance in 2017 with a range of opportunities across the globe.
One of the key concerns in relation to emerging markets is whether returns will remain strong in 2018 given the risks that could possibly deter growth.
Sareen is focused on emerging markets because he thinks there are some changes that are underway at a macroeconomic level that are not fully appreciated by policy makers and investors — notably inflation has fallen quite substantially over the last couple of years.
“Inflation was actually very stable for the prior decade across the emerging markets world but this decline we have seen in inflation, we think warrants a much lower interest rate structure on a number of countries.”
Fitzgerald believes areas where investors can get high yields are in emerging market debt.
He contends that investors need to be more selective and try to find those markets where you have a positive real yield in debt markets and more generically within equities in emerging markets.
“If one is willing to take a reasonable timeframe beyond what is going to happen this week or this month. I think there are opportunities.”
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In the UK , what are the potential headwinds for commercial property?
Fiona Rowley, UK commercial property fund manager at M&G Investments, discussed yield expectations, rental growth and explained how her portfolio is positioned to reflect the current market environment.
Listen — Fund Manager Chat: Fiona Rowley, UK Commercial Property, M&G Investments
She highlighted the headwinds from rising interest rates and Brexit, and the potential that the UK commercial property sector will see a divergence of returns.
She added: “We have had more rental growth than we thought, and in the industrial sector where investors have got even more confident, we have had capital growth as well.”
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