Let’s start with what the big boys think, at least the sensible ones:
Here are the Blackrock themes for 2017:
1. Reflation: they believe global bond yields have bottomed – and prefer equities over fixed income and credit over government bonds. We favour short- over long-duration bonds and value shares over bond-like equities.
2. Low returns ahead: Ageing societies and weak productivity growth have led to a drop in economic growth potential. They see these factors capping how high yields can go.
3. Dispersion: They see the gap between equity winners and losers widening. A more unstable relationship between bonds and equities signals a regime change that challenges traditional diversification.
Political and policy risks abound. There is uncertainty about U.S. President-elect Donald Trump’s agenda, its implementation and the timing. French and German elections will test Europe’s cohesion amid a forest fire of populism around the world. China’s capital outflows and falling yuan are worries.
They think developed market equities will move higher in 2017 and prefer dividend growers, financials and health care.They like Japanese and EM equities but see potential trade tensions as a risk. In fixed income, favor high-quality credit and inflation-linked securities over nominal bonds.
For the team behind the £819.8m JPM Global Macro Opportunities fund, the election coincided with its quarterly strategy meeting and has prompted a number of changes in the portfolio.
Themes running in the portfolio include Japan beyond Abenomics, Europe gradual growth recovery and US economic strength but the election of Trump in the US prompted one of them to be removed, according to JP Morgan client portfolio manager Nicola Rawlinson
The fund has removed the global ‘low inflation’ theme, which had been running for the past four years and had around a 16 per cent weighting in the portfolio.
The move highlights the managers’ belief that a Trump victory and its implications will lead to disparate growth and inflation paths for the US compared with the rest of the world.
“We’ve been making changes, these were in part catalysed by the unexpected outcome of elections, not only of Trump but the Republican clean sweep [in the Senate] and the implications,” they explained.
“We’re moving to a theme of constant inflation. We see inflation picking up in different parts of the world.”
The fund’s team have reduced duration in the portfolio from over one-year to a short position, the first time the fund has made such a move.
The lack of long fixed income exposure in the portfolio means it has moved towards a greater mix of equity strategies and currency and derivative strategies to provide diversification.
In its equity allocations, the team have reduced long exposure to utilities, healthcare, telecommunications and consumer staples. It has also reduced short positions in industrials, moved from a short to a long position in global financials.
The US growth theme remains in the fund, although there remains a certain amount of uncertainty about what policies president-elect Trump will pursue once he has taken office.
“It’s not all US, we are adding quite a bit of European and Japanese equities where we can find areas to benefit from the upside to US growth,” she added. “Europe is still trading at attractive valuations.”
“What that means overall at a portfolio level is that allocation to equities has gone up, and we can expect higher volatility.”
Indeed, the portfolio changes have resulted in an increase in the fund’s delta ratio. “Our delta is now at 60 per cent, [having been] in the range of 20-35 per cent for most of this year,” she added. “A fairly significant increase to equity risk.”
The managers have also added significantly to its long US dollar versus short emerging market and commodity-exposed currencies.
Prices for most commodities, including oil, are forecast to rise in 2017 as a long period of declining prices appears to be bottoming out, according to the October Commodities Markets Outlook.
Oil prices are forecast to rise to $55 per barrel next year from $43 per barrel in 2016 as markets readjust after an era of abundant supply that outpaced demand. Energy prices, which also include coal and natural gas, are forecast to jump 24 percent in the coming year. The decision in September of the Organisation of the Petroleum Exporting Countries (OPEC) to resume limiting oil production is another important factor behind the higher price forecast.
When OPEC members announced that they would aim to cap production at around 33 million barrels of oil per day, it signaled the potential end to two years of unrestrained production. Oil prices had fallen as low as below $30 per barrel during that period. Details of the plan, which does not include important producers Iran, Libya and Nigeria, have yet to be worked out and are due to be announced in November, but markets have begun to anticipate a return to higher prices.
Metals prices are projected to rise more sharply than expected in 2017, in the last forecast in July, as a result of rapid mine closures ahead of schedule. However, a further growth slowdown in China could weigh on metals prices. Metals fell 9 percent this year.
Food prices are forecast to rise modestly as a decline in grains prices is expected to offset a rise in prices for other food commodities. Larger than expected increases in energy prices, a key cost component in agriculture, could push food prices even higher than forecast. The risks of disruption from the La Niña weather pattern have diminished.
Precious metals prices are expected to fall in 2017 as appetite for safe-haven buying ebbs with rising interest rates. Gold is expected to dip to $1,219 an ounce from $1,250 an ounce this year.
100 USD invested by FieldInvest on January 1 2013 is now worth 165 USD*
* Correct as at end of Dec 2016.
Disclaimer: FieldInvest does not manage money for third parties. We are not regulated by the FCA and do not provide financial services.