By Steven Rees
In our experience, there is an appetite for risk in the Middle East region, perhaps more so than in other parts of the world. But investors are also quite thoughtful about that risk, writes Steven Rees, managing director and senior investment advisor, JP Morgan Private Bank US equities.
In our experience, there is an appetite for risk in the Middle East region, perhaps more so than in other parts of the world. But investors are also quite thoughtful about that risk.
As equities tend to be quite volatile but produce great returns over time, clients here have always been receptive to investing in global equities.
Given where we are in the cycle, and looking at the fact that interest rates have hit bottom and are now beginning to look higher, we think that equities have the most upside for 2018 and we will be looking to increase our clients’ allocations in their portfolios.
Because stocks are sitting at or close to all-time highs, there’s a perception that they are overbought, but I would take the other side of that view. Very few clients are actually at the proper allocation in their portfolios.
We’re quite excited about 2018 and are generally bullish.
Why equities are so high can be explained by the global recovery and the profits derived by the corporate sector. In 2018, that high is only going to go higher – which is the result of the recent US tax cuts and a broader-based recovery.
We don’t think that the returns will be as strong as 2017 because a lot of the benefits were already being priced in at the back end of the year, but we expect double-digit growth for the year from global equities. So, stay in the asset class or even add to it.
This recovery has been slower but also longer, and driven by cost-cutting and efficiencies in a slow-demand environment. That means there is more room for them to grow and, more importantly, to start to invest in new projects – which is what leads to growth.
This year, that’s what we’ll be looking for, especially with the new tax environment and, hopefully, more money in the hands of the US consumer.
Growth stocks outperformed value stocks in 2017 by 14 percentage points, so this year, while we’ll still look to growth stocks, we’ll be advising people to not go underweight on value stocks.
A lot of the value sectors will benefit from the tax cuts and the US president’s agenda – primarily infrastructure spending.
Higher interest rates, lower taxes, low inflation, deregulation plus growth means it looks good for financials, while industrials will benefit from the political agenda in the US.
We still have a very positive view of the healthcare and the technology sectors; they remain two of our favourites and we’re not backing off those, but it’s important people balance them off with value stocks.
The main challenge for us in 2018 is that there are no longer any cheap sectors or stocks out there, so it’s going to be harder for global investors to find growth that exceeds expectations. There are no good deals in the US market right now. So, that’s why emerging markets, where valuations are better, will be appealing.
They are also important in a longer-term sense, with growth not just in 2018 but also into 2019 and 2020. We’ll be looking at the growth sectors in China that we feel have a strong upside – that’s primarily healthcare, technology and clean energy.
Oil is at a real sweet spot just now. Prices in the $60-$70 range are good for the producers and good for consumers, too. Our view for the year is range-bound around that figure but we are skewed to the upside.
That is based on the fact that OPEC has extended its cuts and the fact that demand from China is picking up, so we could be looking at some upward pressure. So we’re watching that.
Gold is also range-bound for us; we have a price around $1,275, so looking at the price of around $1,325 today, we think that’s a little overweight. But again, we always think that there’s room for gold in every portfolio.
We do believe in active managed funds, that’s how we built our business. But we’re not afraid of ETFs, either, and a portfolio should include both liquid ETFs and managers who express a more detailed view on investments when they have it.
Technology is a great example of this; a manager can offer exposure to small blockchain companies that an ETF perhaps couldn’t.
But equally, looking at Europe, we’re comfortable buying the whole market as we see plenty of upside in the next 12 to 18 months. The view on ETFs versus active is always changing, but we’re happy to have both.
Everyone wants to talk about this for 2018, which is somewhat understandable, but we don’t have a firm view on them right now. We don’t advise our clients to invest in them, nor do we suggest they stay away – and we don’t currently facilitate trading in them.
As an equities analyst, I think it’s difficult to understand the fundamentals behind them. I’m used to looking at cashflows, earnings and demand, so this asset class is difficult to assess.
However, the blockchain technology behind cryptos is interesting, and we are developing strategies to look at investing in companies that utilise it, as well as other new technologies such as cloud computing, AI and so on. That’s how we’re looking at it.
From our perspective, we see plenty of upside in less volatile, less risky assets. I’m happy getting 10 percent upside this year by understanding what I’m investing in.
We always need conviction in our thesis, so if it doesn’t play out we have facts to fall back on. Our fear with cryptocurrencies is whether people really know why they’re buying them.