John Husselbee

Winning by not losing in 2018 and beyond

John Husselbee

This piece originally appeared in Professional Adviser on 14 March 2018.

Just as political conference season falls in September each year, when the House of Commons is in recess, asset management conferences tend to come in January as groups outline views for the 12 months ahead.

Of course, there is no material reason why things should be any different at the start of 2018 than at the end of 2017 but each January offers a chance to reset and test your views against the market. Having been through another season in recent weeks – attending around a dozen events including our own annual conference at Liontrust – a few trends have emerged about what we might be facing over 2018.

One clear theme we have discussed elsewhere is the importance of the US dollar, with the current weakness a key reason behind the synchronised global growth we are enjoying.

As with everything US-focused at present, the President looms large. Trump helped turn a trend of US dollar strength prior to his inauguration last year when he said the currency was too strong and US companies could not compete as a result, particularly against the Chinese. Since then, the Dollar Index is down close to 10% and fell to a three-year low at the end of January this year when Treasury Secretary Steven Mnuchin, speaking in Davos, echoed Trump’s stance that a weak dollar is good for America and sparked fears of a trade war.

On my travels, I have seen convincing arguments for dollar weakness and renewed strength and your view ultimately depends on the lens through which people are looking: in the short-term, after substantial falls, it may look cheap; from a longer perspective, it still looks overvalued relative to the long-term average.

LGIM’s head of economics Tim Drayson is in the undervalued camp for example and said at a recent event that he believes the rising interest rate differential as the Federal Reserve continues to hike could help the currency to a stronger 2018.

As ever, we would stress our crystal ball is no clearer than anyone else’s when it comes to economics and currencies are particularly hard to predict. What we can say is that tracking how the dollar behaves over the next 12 months and beyond will likely give a better perspective on overall markets than the daily ebb and flow of economic and market events.

Beyond the dollar, the US economy – and the continued adventures of Trump – were a key topic of many conference sessions. Franklin Templeton’s bond manager Michael Hasenstab spoke on a webinar about meaningful changes over recent months that should push forward US GDP, namely deregulation, tax cuts and ongoing repatriation of overseas profits.

For Hasenstab, this will create higher deficits and potential challenges for the Fed as it moves from quantitative easing to tightening. Of course, as a bond investor, Hasenstab’s concern is that with the Fed stepping away, who is the next big buyer of bonds?

With many conferences, the aim is not necessarily to gain fresh insights but rather to reaffirm our calls, whether on the market as a whole or individual fund managers. If we have bought a particular manager for their value bias for example, we would not want to find them evangelising the prospects for micro caps in 2018.

For my part, I remain positive on the opportunities in emerging markets and Artemis manager Raheel Altaf believes the region is in the sweet spot with more attractive fundamentals and earnings stronger compared to developed peers. Volatility has always been the drawback for emerging counties but Altaf claims the so-called fragile five of a few years ago – India, Brazil, Turkey, South Africa and Indonesia – are now much firmer as their currencies have depreciated and economies rebalanced. This has left much of the emerging world looking more self-sufficient and less reliant on what happens in the West.

We have also written about the potential opportunity in value stocks this year after a long period of growth ascendancy and found support for that at our own Liontrust conference from managers Stephen Bailey and Jamie Clark.

The pair highlighted the Phillips Curve, which shows a historical inverse relationship between rates of unemployment and wage growth within an economy. Put simply, falling unemployment correlates with higher rates of wage growth and inflation – and if higher inflation is coming, that tends to support value stocks.

More generally, I was not surprised to find the idea of ‘fixing the roof while the sun shines’ as a common trait of many presentations, with several groups expecting a correction in short order. As we know, this is exactly what happened in February and while few are predicting outright recession to come, many commentators are now erring towards caution and suggesting it is worth ensuring some hedges against further setbacks.

Our view here is that we have seen many market pullbacks before and the vital lesson has always been to maintain investment discipline. Our style is naturally defensive and a winning by not losing strategy is built to withstand the natural ebbs and flows of markets and help our investors get rich slowly.

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Monday, March 19, 2018, 2:51 PM