10 investment ideas to unearth in 2018
2018 is the Year of the Dog but it doesn’t mean you have to bury your assets under the ground to save its value for later. Instead, unearth these investment ideas and learn the hacks on how to grow them.
The incoming year is not likely to be as smooth as 2017 from a markets perspective. Volatility will probably rise from current very low levels and risky asset prices may not rise as fast as they did in 2017, noted Christian Nolting, global chief investment officer and global head of DPM, Deutsche Bank Wealth Management. “Domestic political risks remain in the US and Europe, as well as geopolitical risks around the world.” But global economic growth, Nolting added, will continue to pick up, and will reach about 3.8% in 2018. “We remain broadly optimistic,” he noted.
Singapore Business Review rounded up the most promising investment opportunities and listed some life hacks to guide investment decisions based on investor outlooks and conversations with industry experts and observers. These range from focusing on the potential of technology to provide solid returns to the importance of understanding diversity and balance in investments. The usual caveat applies, here at Singapore Business Review, we don’t have a crystal ball and merely gathered ideas from the experts. If we have a crystal ball, we’d give up publishing and just be professional investors. Nevertheless, here are 10 investment ideas to bark at in 2018.
Equities will continue to be a preferred investment option, according to Ricky Tang, product manager, multi-asset, Schroders, as the global market continues to stabilise and pile on the upward trajectory seen over the last 12 months, giving plenty of reasons for stock investors to cheer for next year. “Equities remain our preferred asset class, which should continue to deliver positive returns in 2018,” he said. “As equity valuations are not cheap, returns are likely to come from earnings growth rather than multiple expansions in the future.”
Nolting also shared that at a general level, investors should continue to favour equities over fixed income, with equities expected to continue providing opportunities in 2018, even after this year’s gains. At the time of writing, for instance, the MSCI AC World had hit 68 record highs in 2017, the most on record.
“But earnings growth will be key, as price/earnings and other valuation multiples start to move down from elevated levels. With generally lower returns likely than in 2017, selectivity between sectors and between geographies will be important in 2018,” the Deutsche Bank’s Nolting said.
Earnings of global equities are expected to grow at
7% in 2018, with global financial services firm Credit Suisse also saying that the continuing bullish outlook of financial markets—particularly that of the Us—will spill over to next year. For instance, S&P 500 will likely rise 13% by year-end 2018, according to the firm’s latest market strategy report. This positive outlook on global
As equity valuations are not cheap, returns are likely to come from earnings growth rather than multiple expansions in the future.
equities growth, according to Tang, is supported by the strong cyclical environment of steady growth and subdued inflation pressure. “Within equities, we believe better opportunities lie in markets with cheaper valuation and stronger growth potential,” he said.
This is echoed by Arthur Kwong, Asia Pacific head of equities for BNP Paribas Asset Management, particularly noting the well-performing Asian equities since January as a good condition for what’s to come in the next 12 months, although a slight moderation is expected towards the end of the year. The cushioning factor is mainly driven by earnings revisions and currency appreciation, more so than higher valuations. Dr. Jasslyn Yeo, global market strategist at J.P. Morgan Asset Management, said in a statement that whilst equity valuations are high, they expect these instruments to stay elevated for some time, with preference to cyclical and financial sectors.
In this day and age of everything digital and innovation, it is not a surprise that banking on technology—from stocks, shares, crowdfunding, etc.—continues to be a hot investment opportunity year in and year out. Brendan
Mulhern, global strategist for Newton Investment Management, said that sharing in the growth story of technology startups and groups that pushes the boundary of technology in the market space is an example of a smart investment decision.
“The potential disruption created by this trend, creates great opportunities for new businesses and existing ones that adapt to the new openings,” he said, adding that technologies should branch out beyond the consumer sector for it to reach its full (earnings) potential.
“As the potential corporate applications of these innovations become clearer, there is broad scope for companies to reverse this trend [on focusing on the consumer sector alone],” Mulhern reckoned, citing companies including Microsoft, Cognizant, and Sap—all of which provides enterprise technology and consulting services—could be a starting point for people looking for technology companies to invest in.
Nolting also added that there should be a keen interest and following on the tech industry in Asia that’s ripping through silos and records every single year, given that majority of the hardware—and increasingly software—in today’s tech markets are coming from the continent.
“We remain keen on technology and also on Asian emerging markets, in part due to its tech component— but economic fundamentals are also likely to support equity markets in this region too,” he said. “Asian equity markets seem likely to outperform most developed markets next year. We have an existing High Conviction Idea on Chinese equities.”
3. Materials, industrials, and financials
Beyond technology, however, there lies several sectors that are making a comeback. Robert Rountree, global strategist, Eastspring Investments, said the long ignored cyclical sectors of materials, industrials, and financials are swinging back into favour, especially in Singapore where the finance industry remain robust and resilient amid movements in the global economy.
“Remove the technology stocks, which rallied strongly, and good to deep value is to be found elsewhere in both developed and emerging Asia including Japan,” he said. “As valuations in these sectors are still mostly low, there is plenty of potential upside.”
This bullish outlook for all three sectors have been steadily gaining ground over the last few quarters, although their strong performance remains overshadowed by trendier momentum on sectors like information technology. Bloomberg’s Global Market
Asia Index, for instance, shows significant year-to-date growth on financials at 18.48%, industrials at 23.61%, and materials at 25.85% for the rest of Asia.
4. Emerging markets
Perhaps one of the most enduring economic stories over the past decade is the economic rise of developing Asia, and betting on this trend will remain to be a smart investment decision for 2018. Kwong noted that Asian equities have outperformed larger markets globally this year, particularly with the performance of China, South Korea, and India.
Florence Tan, head of advisory – strategy & multichannel communications at Citi, shared that whilst uncertainty over the next US Federal Reserve Chairperson and faster than expected US rate hikes could lift market volatility, corrections in emerging markets can be viewed as opportunities given the robust global growth outlook and attractive valuations.
“Emerging market equities continue to trade near a record 40% valuation discount to the US,” she said. “In
Asia, 6.5% yields of local currency Indian bonds are among the most attractive in the region, supported by the country’s longer term economic turnaround.”
This is an important opportunity for investors in Singapore given the country’s strategic location at the heart of Southeast Asia—and the rest of Asia—where most of the growth is happening and will continue to blossom from. From sectors like technology, manufacturing, industry, and finance, there is a wide array of investment opportunities to choose from. This is on top of the region’s burgeoning startup scene, which opens up more investment opportunities for more localised and sophisticated commodities.
Newton Investment Management’s Mulhern, however, said that there is little guarantee that flows into emerging market assets over the last 18 months will stick around if global financial and economic conditions start to deteriorate, particularly next year. “It is likely that global growth and global financial conditions have peaked, which we believe warrants a reduction in emerging market assets over the next year,” he said.
Deutsche Bank’s Nolting also noted that on emerging markets, it’s better to focus on equities over fixed income. “On fixed income, we have grown increasingly cautious during 2017 as corporate spreads have rallied to close to our 12-month targets. I don’t think that we are likely becoming markedly more optimistic on this asset class in 2018,” he said, adding that there may obviously continue to be interesting areas in this asset class, particularly within emerging markets debt (which should benefit from a continued pick-up in economic growth combined with generally low levels of inflation) but this may not be the place to focus your investments in.
China’s spectacular economic growth is tapering off, with growth continuing to average 6% to 7% over the last few years compared to 14.2% growth domestic product (GDP) growth rate a decade ago. However, experts are still saying that banking on Chinese industries and activities remains a smart investment decision to make, especially when the country now plays such a big role in the modern global economy. “Increased rigour in risk mitigation ahead of topleadership changes in Q4 are crucial for Beijing to preserve economic, social, and political stability,” said Kwong. “Stability in China should allow for a stable year for Asian equity markets.”
Tan also shared that the Chinese government’s willingness to institute reforms and institutional changes have been showing results. “Key emerging markets including China has shown far more structural reform progress than many investors expected this year,” she said.
Japan’s lacklustre economic performance over the last couple of years, after becoming a developed economy many decades ago, may have erased it from the map of investment opportunities or put aside. But Rountree shared that Japan equities is providing a window of opportunity once again.
With investors still seemingly fixated on the success or otherwise of Abenomics, with the equity market falling and rallying on the ebbing and flowing of the confidence tide, Eastspring Investments’ Rountree said that investors are missing the tremendous improvements that are taking place at the corporate level—pushing Japanese companies to have some of the world’s best cash earning yields. “Stronger cash flows are allowing Japanese companies to repay debt, raise dividends, and, more recently, to also embark on share buyback schemes,” he said. “Japan was not immune from the run to safety fears that impacted the rest of the world several years ago. Thus, Japan’s cyclicals look very attractive especially the financials. Unlike elsewhere, Japan’s technology stocks still look attractively valued.”
7. US$ to regain some shine
The US dollar was a mixed story in 2017. At the start of the year, there were reasonable expectations that the US dollar would make further gains on the back of a recovering US economy, further rate hikes from the US Federal Reserve, rising inflation, and President Trump’s pro-growth policies. However, a combination of crowded dollar positioning, falling US inflation, a lack of progrowth policies from the White House, and better global growth compared to the US economy has underpinned dollar weakness this year.
Coming from this position, Mulhern shared that going into 2018, there is a strong case that the dollar has scope to appreciate. “The decline of the trade-weighted
dollar over the first three quarters of 2017 was the largest on record. On this basis alone, further declines are likely to be limited,” he said, adding that the US dollar is poised for further gains with global economic momentum likely to have peaked and the US Federal Reserve poised for further hikes. Nolting also mentioned that the U.S. dollar has recently recovered against the euro and yen and he thinks that further U.S. dollar strengthening is possible.
8. Diversify to EUR and CAD
Despite the bullish outlook of Mulhern regarding the US dollar, Tan shared that the American currency has peaked, with Citi expecting it to move lower given the persistent current account and fiscal deficits and rising net external debt. Historically, multi-year rallies of the US dollar have also been driven by different factors, from having a very strong US economy, the occurrence of a technology boom, and the underperformance of economies elsewhere in the world—none of which are currently happening.
“Citi’s preferred currencies in 2018 include the euro and the Canadian dollar,” Tan said, explaining that the euro is expected to be supported by attractive valuations, a large current account surplus and the cyclical recovery in the eurozone, whilst the Bank of Canada is expected to raise interest rates again given strong output and labour market activity.
Although global central banks are talking about pulling back from the quantitative easing programs, the growth in liquidity is unlikely to reverse any time soon, according to Rountree. The US Federal Reserve has started to withdraw money as bonds on its portfolio mature, but not only is the pace slow, but it has also signalled it will inject cash into the system again should it make a policy misstep. Where the US Federal Reserve goes, others will follow.
“The case for holding bonds for yield thus remains intact but that yield is to be found in the higher risk and longer duration bonds. On this basis, US high yields and Asian bonds (both local and US dollar) look attractive,” he said. “Asian local bonds look attractive as the US dollar is expensive and should weaken on a longer-term trend basis. Rising interest rates, however, could generate spurts of US dollar strength which could provide buying opportunities for Asian local bonds.”
10. Diversity and balance
As with any investment opportunity and decision, there is a saying that we shouldn’t put all our eggs in one basket. There is a need for diversity and balance on the kind of investment opportunity we’re grabbing, whilst balancing the risk that we expose ourselves into.
According to Rountree, with bond’s long term rally finally petering out, investors have been running towards both higher risk bonds and definitely equities in search of higher returns. “The trick is in balancing these two factors,” he said, adding that in 2018, we expect to see a further run into both higher risk and duration bonds— despite the possible rise in interest rates—and into equities.
In terms of investment behaviour, Yan Pu, head of portfolio review for Asia at Vanguard Investments Hong Kong, revealed four investment philosophies that would give investors a better chance of success: set an investment goal; build a balanced portfolio; stay disciplined; and be mindful of the investment cost. “Vanguard believes that cost is one of the few controllable factors in today’s dynamic market. Every penny you save in cost will eventually contribute to the return of your investment portfolio,” she said.
Bonus: Sectors likely to silently make gains in 2018
As a bonus, we’re adding some more sectors that may likely provide investment gains, according to Deutsche Bank’s Christian Nolting. These are infrastructure, cybersecurity, global ageing, and the millenials.
“These secular trend themes have done well yearto-date and are intended to complement shorter-term ideas in a portfolio. As recent cyberattacks have shown, cybersecurity is a rapidly growing problem which will demand substantial private and public spending to counter. Opportunities could also be provided by merger and acquisition activity in the cybersecurity sector as it grows and consolidates,” he said. Nolting concluded by saying that infrastructure will also require major spending in the coming decades, particularly in the emerging markets. “Global ageing has impacts well beyond healthcare, for example, on insurance and other financial services. The spending patterns of millennials are already a focus for investors, given millennials’ interest in consumer technology and lifestyle spending,” he said.
Investors should continue to favour equities over fixed income
Dr. Jasslyn yeo