Top five investment trends for 2017
The world is slowly moving on from the aftermath of the 2008 financial crisis and the economic life support provided by the world’s main central banks. Here we look at some of the main current investment themes for 2017.
Europe wakes up
A year ago, Europe’s economies were struggling to grow, lagging behind the US and UK. But many commentators were urging investors to look towards Europe for its turnaround potential, and arguing that quality companies were being overlooked due to negative sentiment on the economy and fears over political upheaval. In 2016, investors pulled around $100 billion from European equities, and private investors were still selling them by March. But the institutions began to pile back in.
European markets rallied strongly as fears of victories for the far right in the Netherlands and France proved unfounded, and growth ticked up sharply. In the 12 months following the UK referendum on EU membership, European equities were among the top-performing asset classes, only just behind emerging market and Asia Pacific equities. The two biggest European equity exchange traded funds (ETFs) were showing gains of around 18% in 2017, while a German small cap ETF was up over 28%. Small investors are returning to a Europe which is being galvanised by resurgent confidence in the EU. That confidence is being driven forward by German Chancellor Angela Merkel, set to win yet another term in forthcoming elections, and by France’s newly elected young president Emmanuel Macron.
UK small caps
The fall in sterling after the EU referendum spurred strong gains for the FTSE 100, dominated by companies with significant overseas earnings. UK smaller companies, which were initially sold off, appear to have bounced back even more strongly than their bigger counterparts. Small caps are mainly exposed to the domestic economy and not dependent on European trade, although the sector has a big population of investment trusts, many of which have plenty of overseas exposure. If Brexit anxieties subside, and if interest rates begin to rise, sterling will rise and it is the big company share prices that are more likely to give up some of their post-referendum gains. The fly in the ointment is a possible slowdown in the UK economy, and the squeeze on the consumer. If recession appears on the horizon, growth stocks are vulnerable to a turnaround in sentiment. But for optimists, UK small caps could continue to outperform.
‘The global credit crisis took a long time to unwind and this has kept inflation low. The world economy is now in the early stages of a cyclical upswing. Higher inflation and rising interest rates should be celebrated as the by-product of a healthy recovery,’ said economist and founding member of the Bank of England’s (BoE) monetary policy committee Dame DeAnne Julius.
That would mean bond yields rising and prices falling. However, investors have continued to eke out reasonable returns from gilts, and the BoE still appears more worried about the credit boom and squeezed households than inflation. UK rates have yet to move, and the money-printing by central banks, which has held rates down, continues to stoke the bond bubble. If recovery really does take hold, bondholders will see capital values fall, but for those looking to invest, fixed income could start to look more attractive.
People will not stop shopping on the internet, using Google, checking their Facebook, or listening to music on their iPhone. The US tech titans bestride their markets and grab the headlines with everything they do, most recently Amazon’s deal to buy Whole Foods. Most commentators now seem to accept that there is no stopping Apple, Alphabet (Google), Microsoft, Amazon and Facebook, which between them make up around 10% of the S&P 500 (Apple more than a third of that). Investors can choose an index-based ETF, or one tracking technology, or an investment trust such as Scottish Mortgage which backs the tech theme. The latter was up almost 60% over the 12 months to the end of June, compared with 38% for the global growth sector. If global growth is now reemerging, the tech trend is unlikely to go into reverse.
Use IG’s ETF Screener to find tech-related ETFs.
Making an impact
Funds managed with a greater emphasis on environmental, social and governance (ESG) issues have more than doubled worldwide since 2011, from £7.8 trillion to £16.3 trillion. But while traditional ‘ethical’ investing screened out negative sectors such as tobacco and gambling, or picked ‘best in class’ companies even when they were in non-ethical sectors, impact investing hunts down companies offering positive solutions for social and environmental challenges, and measurable benefits for society. Research from Triodos Bank shows that 63% of millennial investors would like their money to support companies that are profitable and make a positive contribution to society and the environment. It also found that 60% would move their money if they learnt it was being invested in companies that conflicted with their personal values and ethics. George Osborne’s 2015 budget extended tax reliefs to social investing.