January 05, 2018

2018 : stellar start and record highs

Management comment

The year got off to a roaring start, extending the gains recorded during 2017 among most major asset classes, particularly the riskiest category, namely equities. It is effectively difficult to avoid advising some risk-taking in terms of allocations. Macroeconomic conditions are improving across the board and US optimism is boosting global investor sentiment. Meanwhile, comments from the central banks continue to imply forthcoming monetary tightening, while geopolitical tensions have not deteriorated. However, investors may be punished by being too hasty early in the year. Like a downhill ski racer, catching an edge may lead to a tumble and disqualification.

A series of positive annual equity market performances incite a degree of discernment in investment choices. The current interest rate situation resembles a tightrope walker. Capital flows are spilling over into equities by default and valuation multiples are only slowly becoming less demanding. Earnings forecasts are being revised upwards, although there have so far been no massive upgrades, whereas blue-chip company earnings have been clouded by volatility among exchange rates. Although equities remain a fundamental source of outperformance, alternative or convex strategies, drawing on absolute equity and bond performances combined with inflation-linked and convertible funds, must be considered as a means of hedging portfolios against resurgent volatility and the possibility of a spike in interest rate. Short-dated duration remains the keyword among classic long-only bond strategies.

Lastly, particular attention should be paid to the high yield market where creditworthiness has been eclipsed by the level of interest rates and artificially narrow spreads.

Like alpine mountaineers, investors will undoubtedly scale new summits once more during 2018 but they will need to be firmly attached and armed with the appropriate equipment in the event of an avalanche.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in January 5th, 2018.

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The year got off to a roaring start, extending the gains recorded during 2017 among most major asset classes, particularly the riskiest category, namely equities. It is effectively difficult to avoid advising some risk-taking in terms of allocations. Macroeconomic conditions are improving across the board and US optimism is boosting global...
2018-01-05