Expert Insights: The Global Investment Landscape In 2018

WEALTH (W): How do you think the global economy will fare in 2018 and what does your growth forecast look like?

Ian Pryor (IP): Another good year for global economies with the US obviously being the largest economy in the world at the more mature end of the recovery cycle, but I still see another very good year in 2018 from the US in terms of economic data and that, of course, has lots of positive ramifications for the rest of the world. Jerome Powell is at the head of the US Federal Reserve and he is very pro markets. It’s expected that the US Federal Reserve will raise interest rates a few more times this year which indicates that they are positive on the economic data being reported.

W: How will another US interest rate hike affect markets globally and investors in Asia?

IP: It’s inevitable they will raise rates, however I don’t see a major shift in the investment landscape as a result. We’re talking about very small interest rate hikes, not four or five percent interest rates. Rising interest rates suggest economies are doing well which should, in turn, boost companies. This coupled with the corporate taxation bill that Trump has passed, will lift corporate earnings in the US. The ramifications of this globally are very positive and one thing that should certainly happen as a result is a strengthening of the US dollar, which fell against most currencies last year. This should provide a positive tailwind for European and Japanese equities in particular.

The potential risks of rising rates is the affect it will have on bond prices, but since I don’t see a massive rise in interest rates, I don’t see a massive decline in bond prices and anyway, I don’t think US Government bonds should be in anyone’s portfolio today. In Hong Kong, for example, the Hong Kong dollar is pegged to the US dollar, as are interest rates.

There is a fear of a property bubble — if interest rates keep rising, can people afford the mortgage payments? I think a lot of the high net worth (HNW) investors from China and the rest of Asia will perhaps not be affected. But the people of Hong Kong could be affected more directly. Hopefully, the rates won’t rise too quickly, but that could be a risk.

W: Any other risks that investors should be aware of?

IP: I see macroeconomic and geopolitical risks such as Brexit, Trump, North Korea, and natural disasters. We’ve already seen a spike in gold, which is traditionally a safe haven asset. Nobody will know the ramifications of Brexit for another couple of years. There are always elections and natural disasters. North Korea is also still around and doing their nuclear tests. Generally speaking though, the fundamentals have been strong and the markets have withstood all of these challenges. And at least for the next six to nine months, I see that being the same.

W: What will the British economy look like in 2018?

IP: The British economy is no longer just about London. There has been a huge emphasis on “de-risking” and the overreliance of the UK economy on London. The “Northern Powerhouse” plans and commitments, in particular, seem to be moving forwards. This will help diversify as well as boost the economy. As such I see a resurgence in the stock values of the more domestically focused companies. For foreign investors, these stocks are at very inexpensive valuations, in a very inexpensive currency.

Property is still an interesting sector here as well. Zone 1 of London may seem overheated, however the addition of Cross Rail, the largest transport infrastructure project since the London Underground over a century ago, will give value to certain parts of outer London. In line with the “Northern Powerhouse” drive, other key cities in the UK look attractive. Not just cities with strong commercial centres like Birmingham, Manchester and Leeds, but also the university cities. This includes these three, but also places like Liverpool and Nottingham. World-class universities are one of the best things the UK still offers, and all of this helps drive investment and the economy.

W: Which regions will see higher growth from an investment perspective and which sectors will deliver solid gains for investors in 2018?

IP: We are still positive that the US will have relatively good returns for the next six to nine months, but we are conscious that valuations are starting to get a bit stretched. I would just be cautious and would say there could be some technical correction in the second half of the year maybe even sooner given the sharp upward run equity markets have made already this year. From a valuation perspective, I still prefer Europe and Asia. Asia had a good year last year but for me, it is well off historic valuations. That’s where the growth story is. The positive economic data and growth in the US has that knock-on effect across the world that Europe and Asia will enjoy.

W: Is there a particular sector where the valuations are getting too high, such as the tech industry?

IP: Yes, tech is high, but we are not going to have a repeat of the tech bubble. That was a very different landscape. The tech companies are very different. These companies are not the same as they were during the tech boom and bust. I think there is momentum there though, and all of the brands have their own story and it all stacks up very well. I believe this is a sector that continues to do well. I would be cautious going in today as a brand new investor. This might be something to watch very closely. Maybe stage your investments to get some dollar cost averaging.

W: Which products and innovations will captivate the investing world in 2018?

IP: Anything fintech-related that makes investments cheaper, more efficient, and easier. The three key challenges with investing are emotion, time, and cost. Time – of course everyone is always busy. Cost – there is an expense to time, but also opening an account, initial transactions, ongoing transactions, if you’ve got an adviser, management fees, etc. And decision making –emotions of course come into play. Anything that makes any of those three things better, is going to be a good solution.

In the long-term, companies offering low cost or easy investments will start appealing more and more to a lot of people and it will be the type of innovation that the market is looking for. At IPP Financial Advisers, we don’t have a discretionary licence, we have an advisory licence only ­– but what we’ve been doing very successfully is having an inhouse strategy called Eagle Eye that follows our house view. It is rebalanced quarterly or ad-hoc depending on extreme scenarios. Most importantly, it has a good track record that has outperformed its benchmark on every risk profile last year. But it also removes a lot of the emotion and time out of investing.

W: Where do think cryptocurrency prices are headed?

IP: I think it will have lots of ups and downs. We don’t have a licence to advise on cryptocurrencies and I don’t think most people fully understand them. There is definitely a supply and demand aspect to it, especially in regards to bitcoin. The fever of buying will drive the prices up. Using cryptocurrencies makes a lot of sense, we just need businesses to use them. Everybody should probably invest in them, but only at investment levels that they can afford to lose. There is still a lot of money to be made and lost here, so treat it as a speculative play only.

W: Will the launch of bitcoin futures bring stability to the digital currency?

IP: I would be wary because a bitcoin future not a true future because it’s not deliverable. At the end of the day, cash is given, not bitcoin. So I’d take it with a pinch of salt. It will loosely follow and loosely indicate the direction of bitcoin. I think you’ll see quite a discrepancy based on how much it comes up and down versus bitcoin because there is not that physical asset.

The futures market will help legitimise bitcoin and bring it on to Wall Street. Although going onto Wall Street kind of goes against why it was created in the first place, and it could create more volatility because you might see short sellers and hedge funds. The more mainstream it gets, the more volatility we’ll see.

W: What assets should investors be looking at investing in during 2018?

IP: Definitely equities. I do prefer Europe and Asia, from the valuations perspective, looking at regions. I quite like Indian bonds and interest rates are going down there. Bonds are one less-volatile way to access their economic development, as opposed to equities.

Asian corporate investment grade bonds sit in a very nice area of stability, but still with yield. You’re still looking at 4-5%, which is pretty high in this interest rate environment. In general though, I prefer equities. As a region, I like Asia the most. In terms of sector, healthcare also looks interesting and represents good relative value today

With most asset classes in six to nine months, we will see some healthy corrections. Every investment house is bullish on commodities, which I think will be a trend for the rest of the year as well. In regards to property investments, you really need to look country to country, but as an asset class generally, real estate, like equities will have a really good year.

W: Complete this sentence “The year of 2017 was the year of cryptocurrency, and 2018 will be the year of…”

IP: Financial advice. Don’t leave anything in cash and get the advice on when to buy and sell, and what to allocate it to.