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.

Singapore Business Review - - CON­TENTS -

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.

1. Equities

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.

2. Tech­nol­ogy

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.

5. China

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.

6. Ja­pan

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.

9. Bonds

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

Ricky Tang

Arthur Kwong

Chris­tian Nolt­ing

Robert Rountree

Bren­dan Mul­h­ern

Dr. Jass­lyn yeo

yan Pu

florence Tan

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