As we move into 2017, the annual refresh has never been more useful. That’s because the election in November of Donald Trump as US President has ushered in a radically different investment environment. It’s a regime change in more than one sense.
My ISA and SIPP investments this year will reflect the new investing backdrop because I’m going to ensure that the funds I invest are aligned to four key themes that I expect to unfold as the year progresses.
Theme 1 is the widespread belief that a Trump Presidency will be focused on generating a higher level of economic growth than we’ve seen in recent years. Ultimately that was the promise on which Trump was elected and he won’t want to disappoint.
What that probably means is more government borrowing and higher deficits to pay for a programme of infrastructure spending as well as a reduction in taxes and less red tape. All of these are potentially expansionary and will favour the equity market. They are less likely to be welcomed by bond investors who face higher interest rates and rising bond yields.
I’m going to play this equity-friendly world with one of my favourite global equity funds, the Rathbone Global Opportunities Fund. This is a repeat of one of my recommendations from last year but I make no apologies for that. It served me well last year and I expect it to continue to do so in 2017.
James Thomson, who manages the fund, has a slightly more defensive approach than you might want in this kind of growth environment but that doesn’t worry me because there will be road bumps along the way and this is a fund I’d be happy to hold throughout the cycle.
Theme 2 is related to the first theme. It’s the expected outperformance by developed stock markets over those in the emerging world and in particular outperformance by the US. Although the Rathbone fund has a high exposure to the US, I also want to have a pure play American fund in my portfolio this year to really capitalise on the Trump stimulus.
The one I’ve chosen is the Old Mutual North American Equity Fund. It’s a slightly unusual US fund in that its approach is much more quantitative than its traditional actively-managed peers. This is probably a good thing in a market in which is notoriously difficult to gain a competitive edge.
Ian Heslop, who runs the fund, uses an approach that’s heavy on mathematical modelling and data-crunching. He reckons that is the best way to get an early grasp of changes in market sentiment and behaviour. The Old Mutual fund also has a good track record and I expect it to be a good way to benefit from America’s continued market leadership.
Part of the new growth narrative is a shift in investor focus away from so-called defensive stocks to more cyclical companies and that’s Theme 3 this year. Defensives do well in more difficult economic environments because they are less sensitive to the ups and downs of the economy. But if the growth rate picks up, investors are better off backing more cyclical shares, which will benefit more from the uptick in activity and are usually cheaper because they bring higher risks to a portfolio.
My choice of cyclical fund is the Fidelity Special Situations Fund, run by Alex Wright. He has proved a worthy successor to Anthony Bolton in running this flagship fund using a tried and tested contrarian approach. He is unafraid to buy the shares other investors don’t like so he is a good manager for anyone looking to rotate out of the ‘expensive defensives’. In particular, banks are a big part of the Special Sits portfolio. While they have done well more recently, they were so beaten up before that they should have further to go as growth improves and the gap between short and long bond yields (where banks earn their profit) widens.
The final theme is a consequence of America’s growth story – rising US rates and the strengthening dollar that will probably flow from that. A stronger dollar is good news for America’s competitive rivals because it makes their exports seem more attractive in global markets thanks to their weaker currencies. Japan is likely to be one of the biggest beneficiaries of this trend.
The fund I have chosen to play this theme is also a familiar one to readers of my columns. The Schroder Tokyo Fund was highlighted a year ago when I also expected the yen to weaken in the face of a strengthening dollar. In the end, US interest rates were put on hold until the very end of 2016 and that meant investors had to endure a stronger yen for six months. It also meant that last year was split into a difficult first half for the equity market in Japan before a strong rally in the second six months.
As last year, I’m going to invest in the currency hedged share class of the Tokyo Fund. This will work out if the yen does indeed weaken further from here because I will benefit from a rise in the Japanese market (it loves a weak currency) without losing anything on the foreign exchange conversion. Andrew Rose, who runs the Schroder fund, is an old Japan hand who knows this market well.
Find out more about the four funds in our video interviews:
Tom Stevenson, Fidelity Personal Investing, 04 January 2017
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