Investment Themes 2018: What Matters in the New Year
Each year, we establish the key investment themes that investors should keep an eye on. For 2018, the most important themes to consider are emerging market winners, the eurozone revival, corporate investment, Supertrends equities and a broad range of fixed income investments.
Theme 1: Emerging Market Winners
Emerging market (EM) assets have performed extremely well in 2017. With a supportive growth environment, we expect 2018 to be another good year for EMs.
Our preference is for exposure to EM small caps. The EM rally in 2017 was mainly driven by large caps, and we expect small caps to catch up as fundamentals stay solid. Furthermore, we prefer exposure to EM consumers given that the improvement in EM growth is largely due to robust domestic demand. For instance, this could be achieved by using the equities that we identified as part of our Supertrend "Angry Societies."
Theme 2: Eurozone Revival
2017 marked the first wave of a eurozone revival after the French election. We believe that a second wave will benefit specific European assets and currencies.
- Eurozone real estate is benefiting from sustained European growth.
- Peripheral currencies (SEK, PLN): The undervalued SEK is favored, as Sweden’s small open economy benefits from close links to the euro zone. The PLN can also gain on the back of Poland’s strong trade links with European economies and gradually tighter monetary policy.
- Domestically exposed stocks: We continue to favor companies exposed to the eurozone economy. We believe that the ongoing recovery in the euro zone offers further upside for such stocks.
Theme 3: Corporate Investment
One of our strongest convictions for 2018 is that corporate investment will finally pick up. Companies have large amounts of cash, but they have been very reserved with capital expenditure, preferring to hoard or redistribute to shareholders for lack of visibility. Now many are being forced to invest in areas like IT security and new production processes. Other companies will have to acquire or merge to survive.
- Merger & acquisition (M&A) stocks: We would recommend positioning for a pick-up in M&A activity. We expect the trend to be evident in sectors such as healthcare or telecoms.
- We also focus on sub-sectors and companies most likely to benefit from the increase in capital spending (capex). Capex beneficiaries are found in infrastructure-related sectors or in business-to-business areas. We therefore have a preference for media and software.
Theme 4: Supertrends Equities
Supertrends are our five high-conviction equity themes based on profound and long-term social trends. Despite the long-term nature of our Supertrends, we see numerous catalysts that should benefit the related stocks in 2018.
- The devastating effects of the autumn hurricanes in the US and efforts to rebuild are added catalysts for our Supertrend "Infrastructure."
- Geopolitical tensions and repeated problems with companies' electronic security support the Security & Defense theme, part of our Supertrend "Angry Societies."
- Technology is an ever-evolving theme, including topics such as virtual reality and data waste management.
- Our two demographic themes, Silver Economy and Millennials' Values, tap the two biggest demographic drivers of many sectors and companies, population aging and the "coming of age" of the Millennials as consumers and investors.
Theme 5: Broad Range of Fixed Income Investments
Manifold aspects (fixed or floating, duration, credit risk...) must be considered to successfully invest in bonds in 2018. In the US, the Federal Reserve’s hiking cycle is entering a somewhat advanced stage, while other central banks are starting to normalize policy. Credit fundamentals are likely to deteriorate in 2018 as corporations re-leverage their balance sheets.
Watch the video on Investment Themes 2018 featuring Gérald Moser, Head of Equity Strategy: