Financial markets Investment themes 2018

Investment themes 2018
Every year we highlight our top themes for the year ahead. These annual investment themes are updated according to the House View throughout the year. Investment implementation is ensured with single securities and investment products.

Gérald Moser

Investment Themes 2018

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. Yet, as for assets in other regions, we think opportunities will likely be best approached through actively managed solutions and focused investments, as we see less upside for broad benchmarks.

  • EM equities: 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 the EM consumer 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.”
  • EM carry: After a strong improvement, we do not see EM external accounts improve further in 2018, which is likely to dampen return prospects for sovereign bonds in hard currencies (HC). EM corporate bonds are a relatively expensive alternative as we expect fundamentals to gradually deteriorate. Local bonds offer interesting yields, but duration might not reflect the potential for inflation re-pricing in high profile countries. However, we have a constructive view on EM currencies, with EM real rates attractive enough to absorb a further increase in major DM rates. Combined with a still high carry for very short maturities, this leads us to favor money market instruments. Our preference goes to the TRY, MXN, ZAR and MYR as they offer attractive valuation, already reflecting domestic risks.
The sustained economic recovery in Europe is positive for peripheral currencies and Eurozone real estate.

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: Eurozone real estate benefits from sustained European growth, is underpinned by strong fundamentals and attractive spreads thanks to much higher yields than in EUR fixed income markets. We favor the underlying and listed real estate markets given support from fundamentals and the quality of listed companies’ portfolios. With continued rental and capital growth, company earnings and portfolio net asset values could surprise to the upside. High yields, an ability to pass on inflation and some protection against the impact of EUR strength also support share prices.
  • Peripheral currencies (SEK, PLN): We also focus on currencies of countries where monetary policy might soon be tightened and valuations are still attractive. The undervalued SEK is favored, as Sweden’s small open economy benefits from close links to the Eurozone. The PLN can also gain on 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 Eurozone 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, threatened by disruption, will have to acquire or merge to survive. The potential repatriation tax holiday for US companies could be an incentive to do so in 2018 rather than later.

  • Merger & acquisition (M&A) stocks: We would recommend positioning for a pick-up in M&A activity. M&A tends to increase at this stage of the cycle as companies try to increase growth prospects through acquisitions. We expect this trend to be evident in sectors such as healthcare or telecoms.
  • Capex beneficiaries: 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. The former should be supported by higher advertising spending while the latter benefits from increasing investment from companies across sectors. On the infrastructure side, industrials are best placed to benefit.
  • Private equity funds exposed to a capex pick-up: Private equity is one way to gain exposure to the infrastructure theme. Some funds focused on infrastructure and investment would be well suited in this context.

Theme 4: Supertrends equities

Supertrends are our five high-conviction equity themes based on profound and long-term social trends (see our Supertrends Spotlight). 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 USA 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: Fixed income rainbow

The somewhat unconventional name of this theme reflects the variety of “colors” (fixed or floating, duration, credit risk ...) required to successfully invest in bonds in 2018. In the USA, the Federal Reserve’s hiking cycle is entering a somewhat advanced stage, while other central banks start to normalize policy and credit fundamentals are likely to deteriorate in 2018 as corporates re-leverage their balance sheet. This creates an environment where bond investors require active and targeted strategies.

  • In USD: Given our benign outlook for USD rates, with longer yields expected to remain anchored, duration is favored in USD. Therefore, a mix of long-dated BBBs, short-dated BBs and selective fallen angel bonds is best, in our view, for a bond portfolio in USD. Investors worried about an acceleration of inflation could also add US investment grade corporate floaters.
  • In EUR: Non-financial corporate valuations are excessively tight and insufficient to protect in an environment of ECB policy normalization. Our focus is on financials and in particular subordinated bank and insurance bonds, which should continue to benefit in an environment of sustained Eurozone growth and better bank fundamentals. Investors who are worried about political risks in Spain and Italy may want to focus on bank bonds of other European countries.