I always slightly dread the beginning of January, for it is the time of the ‘lame prediction’ by investment journalists. We’re all collectively dragooned into providing increasingly banal tips about what might happen in the coming 12 months. Obviously, when I am asked I do my best, but I have to say that I increasingly shy away from any bold predictions. By contrast, I occasionally do offer up some moderately contemporary trading ideas – next week in MoneyWeek, for instance, I do discuss why I think North sea oil stocks could be a leveraged way of playing a resurgent oil price. My hunch is that oil prices might stay higher in 2018, but probably then head south into 2019 and beyond. Nevertheless, in that year of high prices, some oil companies might be able to stabilise their finances.
Apart from this specific prediction, I’m not really that enthused about offering up any other ideas about what might change. What I am inclined to do is to observe what I think won’t particularly change, assuming there are no big essentially unpredictable events. These observations form the basis of my own portfolio process and help explain why I’m still fully invested. In no particular order I would offer up the following entirely uncontroversial observations:
- US interest rates will probably get past 2% before taking a breather. This will act as a brake on returns for bonds and will form the backdrop to an increasingly anxious conversation amongst US equity investors about how long the current up business cycle has to last? Your guess is as good as mine and most of us have already been proved wrong by the duration of the current cycle. My very rough estimate is that we are due a slow down within the next 24 months but that’s about as far as I’d go in offering an estimate.
- The odds must still be against a major blow up on Korea despite all the loud noises from both sides. If so that’ll give China a decent chance to stabilise its debt challenges in the next 12 months. It also suggests that if Asia manages to hold together, we should be due another decent year in 2018 for local equities. That’s probably positive for South Korea and Japan.
- British equities look relatively cheap by comparison with their regional peers but worries over Brexit will probably mean that our equities trade at a discount to the Eurozone. Our old friends in the EU, by contrast, should have a decent year or two, and I stick with my medium-term view that Eurozone equities look a slightly safer place to be over the next 12 to 24 months in asset allocation terms.
- More specifically in investment trust land, I think we’ll see notable slow down in new issues and a general reluctance to fund anything with too much property backing. investors are still interested in income generating assets but I suspect they’ve filled their boots with property related stuff and anything new will have to be truly extraordinary to get past the general sense of exhaustion.
- in ETF land we’ll see a continuing frenzy surrounding smart beta. Not because it’s necessarily any smarter than the competition but because of solid business reasons – it allows ETF marketers to have new conversations with investors who traditionally bought active managers. Over the next few days, I’ll be returning to this subject in more detail.
- What next for the tech giants? Much of the rally in equities has been powered by the tech giants, especially the FAANGs and the Chinese majors. I do think there’ll be a growing consumer and regulatory backlash against the majors – again, I’ll touch on this in my blog in coming days – which will result in higher costs. But I also suspect we’re only midway through a big, secular technology shift and the current rally could last even longer. But within the tech space, I think that cybersecurity and the emerging shape of a new electric grid will be hot topics for the foreseeable future. Sticking with the tech theme, I’m as clueless as most people of my generation about digital currencies. You don’t need me to repeat the negatives yet I think that momentum is strong behind these crypto challengers and if i had to bet on one horse in this race my hunch is that Ethereum could set the pace – assuming we don’t have a big blow out
- Overall I repeat a constant theme in these blogs about political risk. On balance I think the Conservative government is safe but if it does stumble over Brexit we could see a snap election (!!!) and a Corbyn Red Labour government in power. I view this prospect with utter horror and the thought of a cabal of Marxists in power should scare the living daylights out of most investors. I have huge respect for Lord Heseltine (with whom I agree on a great many things) but I’m afraid the prospect of a Marxist Labour government is much worse than a bad Brexit. This, for me, is the great investment, Black Swan. I think investors are far too complacent here in the UK and once they begin to wake up to the threat, the implications could be global.
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