Let’s Forecast What Won’t Happen This Year
Skerritts View - January 2017
The beginning of a year invariably sees many so called “experts” forecasting with a degree of confidence what will happen during the forthcoming calender year. I have not found one yet that predicted a “Leave” vote, a Trump victory and a Leicester City Premiership triumph in 2016. In fact, the overwhelming majority forecast exactly the opposite in all three categories. So, to show that it’s never too late to learn, this year we will attempt to foresee what will not happen in 2017 and set out our consequential strategies to try to turn a profit.
The first one carries with it a 100% degree of confidence. Leicester City will not win the Premiership again this year. Consequence: rip up your ticket if you were deluded enough to think that they would.
Before moving on to trickier categories, it is worth clarifying at outset that our general sense of overall pessimism does not preclude us from the odd bout of optimism along the way. After a particularly gloomy report recently, when asked to name the date on which the world would end we were reminded of the wisdom of Bill Gates when he said that, “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” Although he was referring to the world of technology in which his expertise lay, there are clear similarities to the world in which we live today and its various moving parts such as EU transformation, US protectionism (possibly), Middle Eastern power vacuums, Russian re-emergence and a China that will try to remain the only major economy to survive a credit boom turning to bust (previous examples being Japan in the 80s, Asia in 1998, the US in 2007 and the rest of Europe in 2008).
It is fairly safe to say that the UK’s future lies somewhere between a hard Brexit, a soft Brexit, a Goldilocks Brexit, and no Brexit at all. It’s hard to envisage how any of these could occur in 2017, whatever they may mean, and the unlimited options make it virtually impossible to invest in the UK with any confidence. Since 23rd June last year, Sterling is down 14.5% against the G10 currencies while the FTSE 100 is up 15% over the same period. Coincidence? Not at all. So, to make any calls on the UK market (in particular the overseas earnings dominated large cap index) you have to have a clear conviction on what type of Brexit outcome we’ll see. Sterling could regain all that it’s lost, or it could tumble again, depending upon the eventual path. Consequence: unless you have to invest in the UK market, don’t. Our strategy will be to invest carefully in the smaller company sector which will tend to be more domestically focussed and we’ll leave the large cap sector to others.
We’re fairly confident that President Trump will not sit quietly in one of his towers and refrain from offering an opinion on how the country should be run. Whether actions keep pace with rhetoric is another matter, but the initial signs are there that relations between the US and China are not going to become any warmer in the near term and the threat of protectionism and a trade war are real, although the latter could take a little longer to materialise. We are also fairly certain that there are not enough “shovel ready” infrastructure projects ready to roll immediately, so the rush to infrastructure funds could be a bit premature.
We also can’t see interest rates deviating from their steadily upwards direction, which should see the Dollar maintain its best of breed status amongst other major currencies. We don’t foresee a slowdown in cyber security issues or the advance of robotics and automation (this latter sector could brew trouble for Mr Trump amongst his rust belt followers expecting plentiful job opportunities during the oncoming term of office), and we don’t expect the biotechnology sector to remain under a cloud threatened by a Clinton promise to punish pricing irregularities.
Consequence: a strong Dollar and growing international trade tensions could affect those mega-cap multi-nationals that earn more from overseas than at home (major technology companies, for example) and the major US beneficiaries of fiscal and regulatory reduction could be the more domestically focussed small cap sector (as in the UK). A strong dollar will not be helpful for commodities or emerging markets, particularly those with elevated debt levels. We will retain our exposure to cyber security, robotics and automation, and reintroduce the biotechnology sector as our favoured themes.
Inflation won’t come roaring back next year, but it could tick upwards. Treasuries are unlikely to collapse from here, but their upside will be limited so we won’t be rushing into these.
We may be setting ourselves up for a classic “when will they learn” forecast here, but in 2017 we don’t actually think that there will be any more Brexit-type shocks in Germany, France, the Netherlands or Italy. There will be a lot of chatter around their respective elections, but there is the world of difference between a rise in populism and that populism actually manifesting itself in a shock result. The rest of Europe just isn’t as anti-EU as the UK. Neither do they have quite such a flamboyant candidate as we saw in the States, with the possible exception of Marine Le Pen. We’re no experts in French politics but we understand that the way the elections are set up, they are designed to prevent an extremist candidate from winning. A major terrorist outrage prior to, or during, these elections could shift our view.
Consequence: we will continue to invest quite confidently in Europe, particularly as the Euro is likely to remain static or weaker against the Dollar and the European markets still generally trade at a discount to the more loftier valued US markets. Europe is recovering, albeit tentatively, and we like some of the opportunities that it presents to us.
As with Europe, and most of the rest of the world, interest rates are not rising and so, with the Dollar remaining buoyed by the policy in the US, the Yen should remain weaker for longer. A weaker Yen is one of the keystones of Abenomics and the Bank of Japan very effectively helped it along with its yield targeting policy in September last year.
Consequence: we will maintain our overweight to Japanese stocks and particularly, again, the more domestically focussed smaller companies. Japan can be frustrating for investors, but when it moves, it moves, and we expect a further bout of upward momentum from our Japanese holdings at some stage this year.
Well, we probably won’t get all of the above right, but we will learn from last year when we called the January correction correctly, but failed to invest in the right funds to profit from it. This time around we, like most investors, should accept that the nature of markets in the current environment is one of volatility – the warning that the value of your investment can fall as well as rise is not a frivolous one – but we will try to find sectors and investments that can bounce quickly from any downturn.
As always, we are prepared to change our minds quickly if need be, as we have our own money in the portfolios that we manage.
Have a very Happy 2017 and we hope that by this time next year we can look back with satisfaction, while looking forward with some trepidation to what the future holds.
Sources – BCA Research December 2016
These are our views, as always, and don’t constitute advice in any way.
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