Markets where fund managers are putting their money
Laura Suter discovers where fund managers have decided to put their money next year in search of the highest returns
Stock markets in Europe and the emerging economies will produce the best returns next year, professional investors say. Almost a third of fund managers expect Europe to produce the highest returns next year, while almost a quarter picked emerging markets as the most promising area, according to a survey by the Association of Investment Companies (AIC), a trade body.
Research from Bank of America Merrill Lynch told a similar tale, with 45pc of global fund managers saying they had a greater percentage of their money in Europe than would be suggested by the region’s share of global markets.
After a strong rally this year, the US stock market has lost some of its appeal for fund managers: it was seen as the most attractive region going into 2017 but has slipped to third place for the coming year.
Fund managers said their confidence in Europe was based on steady economic growth, high consumer and business confidence and decent earnings growth, after a better-than-expected 2017. Lucy Macdonald, manager of the Brunner investment trust, a global portfolio, said: “Europe has delivered a number of positive surprises in 2017 and early indications point towards another good year ahead. It offers investors relative stability and a strong positive vision for growth.”
However, some investors are still nervous about Europe and in particular about the effect that interest rate rises could have on stock markets.
Ryan Hughes, head of fund selection at AJ Bell, the investment shop, recommended the Crux European Special Situations fund, run by Richard Pease, for investors who want to bet on European growth. He said the fund “typically finds more opportunities in medium-sized and smaller companies and, while it can be more volatile than its competitors, it is proof that talented stock pickers can add significant value”.
Emerging markets delivered some of the highest returns in 2017, returning investors more than 21pc for the year. But despite this, fund managers are still confident, with the Bank of America Merrill Lynch survey showing that 35pc have more in emerging markets than their share of global stock markets would suggest.
Nick Price, manager of the Fidelity Emerging Markets fund, said: “Despite a period of superior performance, it is critical to highlight that emerging markets are rising from a very low base. With a heavy discount to share prices in developed markets, these assets remain attractive.”
What are fund managers avoiding?
Fund managers’ biggest fear going into 2018 is much the same as last year: Brexit negotiations weighing on UK stock markets. The AIC’S research found that 23pc of fund managers expected disappointing Brexit negotiations to be the biggest threat to stock markets in the coming year.
This is already reflected in fund managers’ allocations, with 34pc having less exposure to Britain than the size of its market would imply, according to Bank of America Merrill Lynch.
Thomas Moore, manager of the Standard Life Equity Income Trust, said: “The UK political environment remains highly uncertain, which has resulted in a divergence in valuation between stocks and sectors as investors have tended to spurn small and medium-sized stocks in favour of defensive larger stocks.”
However, he said that any political uncertainty could provide a buying opportunity, as some stocks had become unfairly undervalued.
A number of managers said they expected the lack of volatility seen in markets in 2017 to come to an end next year. Stephen Jones, chief investment officer at the asset manager Kames Capital, said: “It is probably naive to anticipate that markets will go up in a similar ‘straight line’ as they have this year.”
Cautious investors should consider the Troy Trojan fund, said Mr Hughes. The fund “has a very clear eye on protecting capital”, he said.
“The portfolio has exposure to shares, bonds, cash and gold, making it well diversified and giving investors an instant portfolio. Should volatility increase next year, this fund is well placed to protect investors,” he added.