Liontrust fund managers’ “Reasons to be Cheerful” in 2017

Having given us their Halloween “Reasons to be Fearful”, we asked the same Liontrust fund managers to highlight aspects of their research which point to a more optimistic outlook for 2017

Rising US interest rate expectations give cause for cheer

Jamie Clark

Jamie Clark, fund manager, Macro team: “This chart illustrates the probability (as implied by futures markets) of the benchmark US interest rate being set at a particular level at the US Federal Reserve’s March 2017 meeting. We can see that there is a growing expectation of modestly higher rates, and this gives us some cause for cheer. Broadly, we have avoided the manifest perversity of negative rates; the social externalities of Quantitative Easing are likely consigned to history; zombie capitalism and the suppression of productivity can be put to rest; and the post-crisis appetite for bond-proxy equities should be sated. Furthermore, implicit in the assumption of rising rates is a stirring of animal spirits and the anticipation of economic growth.”

Fed Funds Probability: meeting on 15 March 2017

US water sector primed to make a splash in 2017

Hugo Rogers

Hugo Rogers, fund manager, Liontrust GF Global Water & Agriculture Fund: “Heading into 2017, we think the water and agricultural sectors sit at the confluence of positive cyclical and structural trends. There is more top line and earnings growth momentum in the US than in any other region right now and the Fund has a large exposure to the States. In addition, any fiscal boost is likely to benefit water and agriculture equipment and infrastructure companies, where the Fund also has a number of positions. The chart shows employment in the US water sector and is indicative of growth in this area. We think that this is a leading indicator presaging significant capital expenditure.”

US Water & Sewerage sector employees (000s)

A weaker pound and rising oil price can boost the UK’s engineering sector

Anthony Cross

Anthony Cross, fund manager, Economic Advantage team: “The flipside of my Halloween chart of pound weakness, which showed how scary it can be for importers, is the boon which the UK’s manufacturing base will receive as their goods become more competitive to export. This chart shows the Purchasing Managers’ Index manufacturing survey – a leading indicator of activity levels – jumping from below 50 (indicating contraction) to a peak of over 55 following the Brexit vote.  With oil and other commodity prices also recovering as we head into 2017, this will provide an additional tailwind for the range of UK engineering companies selling their products into mining and energy sectors.”

UK Manufacturing PMI

Technical uptrend in the offing?

James Inglis-Jones

James Inglis-Jones, fund manager, Cashflow Solution team: “Around this time last year, our technical indicators suggested that European markets had entered a downtrend. They stayed in this pattern until late-August 2016, with UK investors in Europe receiving positive returns due only to currency strength relative to sterling. As we head into 2017, however, the technical picture is much more encouraging: we are currently in a neutral regime, with the potential to enter an uptrend in the very near future. Levels of corporate aggression (with respect to cash investments) are relatively low, which is a further positive. While some behavioural evidence of investor complacency suggests that we should not be overly bullish, we are certainly looking at a more positive set of variables than at this time last year.”

European market performance and volatiility 6 months subsequent to regime state

Europe ready to withstand more shocks in 2017

Olly Russ

Olly Russ, fund manager, European Income: “The political situation in Europe rarely looks appetising, and elections next year in France and Germany next year could add to political instability. But looking beyond this we see evidence of its steady economic recovery, as shown by the falling unemployment rate in this chart. No doubt there will be unknown unknowns to surprise us in 2017 – but the corporate sector is sufficiently healthy for us to find plenty of quality, dividend-paying companies.”

Eurozone unemployment

Emerging markets to diverge next year: pick economies with leverage to US growth

Patrick Cadell

Patrick Cadell, fund manager, Global Equity team: “Trump’s election victory is likely to lead to significant divergence within emerging markets. The benefits of stronger GDP growth will be offset by US dollar appreciation and higher interest rates – which both typically reduce capital flows to emerging markets. As the manager of a long/short fund, this return profile is appealing. ‘Long’ investment opportunities include those economies which have high leverage to the acceleration in US growth, such as the North Asian markets of South Korea and Taiwan. The chart shows the high correlation between the South Korean stock market and the ‘new orders’ component of the Institute of Supply Manager’s index – a lead indicator for the US economy.”

Developing countries' stock market correlation with US ISM 'new orders'

Positive prospects for export-led UK economic growth 

John Husselbee

John Husselbee, Head of Multi-Asset: “The falling purchasing power of the pound may mean that 2017 is a tough year for UK holidaymakers, but it should be good for the economy. A weak currency has long been seen as a route to export-led economic growth, hence the temptation for governments and central bankers to effect a competitive devaluation (and risk a currency war). As we know, however, this bout of sterling weakness is not the result of a coordinated policy programme targeting devaluation, but rather a side-effect of recent political events. Nevertheless it should prove effective in supporting exports and large-cap profit margins in 2017.”

Sterling effective exchange rate (Jan 2005 = 100)


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• The information and opinions provided should not be construed as advice for investment in any product or security mentioned.  • Always research your own investments and consult with a regulated investment adviser or licensed stock broker before investing.

Originally published 19 December 2016.

Thursday, January 12, 2017, 4:01 PM