The global macro environment continues to look strong, despite ongoing geo-political risks, but domestically the outlook is less positive, according to Bennelong Funds Management’s boutique asset management teams.
Greg Goodsell, Global Equity Strategist at 4D Infrastructure, said all major economies are showing positive signs.
“The post GFC stagnation is coming to an end, with inflation slowly re-emerging around the world and interest rates heading up.
“The US is already strong – with potentially further support via President Trump’s stimulus. Euro zone economies are at various stages of recovery and looking strong, Latin America is in slow recovery, and Japan is actually growing for the first time in a long time.
“Two of the world’s biggest markets are also performing well, with China gaining momentum in its shift to a domestic driven consumption economy, and India powering ahead.
“However, geo-political risks remain elevated in 2017, including the election in Germany in September and the regional conflicts in Asia and the Middle East. This warrants caution; nonetheless investors need to separate the politics from the economics,” he said.
Mr Goodsell said that for infrastructure investors, this environment creates good opportunities; however active management is increasingly important.
“At 4D, we are currently overweight Europe and emerging markets, and underweight the US. We prefer ‘user pays’ infrastructure at the moment compared to utilities, and continue to take advantage of the changing demographic story around the world, where the west is getting older but much of the east younger.
“Coupled with an emerging middle class, especially in Asia, this creates significant opportunities for selective investment in infrastructure,” said Mr Goodsell.
Justin Blaess, Portfolio Manager at Quay Global Investors, agreed that global investment opportunities were looking particularly strong.
“Global real estate fundamentals are still generally attractive owing to expanding economies and a general lack of construction post-GFC, limiting supply in certain markets.
“The US is still benefitting from historical under-investment following the GFC, and accelerating growth is positive for demand.
“In the United Kingdom, uncertainty around Brexit persists but the lower currency will act as stimulus, while in Europe, weak historical demand and red tape in certain sectors has created a low supply dynamic and a long-term opportunity
“However, Australia is a market we are particularly wary of. Imbalances in the Australian residential market are creating risks and this is likely to have an impact on other sectors, including office, retail and industrial,” said Mr Blaess.
Julian Beaumont, Investment Director at BAEP, said the domestic picture in equity markets was less rosy than internationally.
“While there is good evidence of global recovery and growth, this is not the case in Australia.
“Currently, the subdued economic growth in Australia presents earning risk. For investors in the Australian equity market, the best opportunities are beyond the big banks, resources and slow-growth yield stocks.
“We remain stock-specific and focused on lower-risk propositions with more predictable and underappreciated longer term value creation.
“The current themes throughout our portfolios include a heavy concentration to ‘all weather’ businesses selling relatively defensive products and services such as hospital services, wine, pizzas, and electricity, and a heavy concentration to global businesses with exportable competitive advantages” expanding in offshore markets,” said Mr Beaumont.
Alastair Macleod, Portfolio Manager at Wheelhouse Investment Partners, said that as the global recovery continues, it is important that investors don’t start to take the current low levels of volatility in markets for granted.
“It has been a period of surprisingly low volatility, but investors shouldn’t assume this is going to continue. They need to position their portfolios to manage risk as effectively as possible, particularly as they approach retirement.
“People often refer to a ‘100 year storm’ in investment markets, suggesting that events such as the GFC only happen once in a lifetime. However this is very misleading.
“Returns from financial markets exhibit ‘fat tails’, which means that supposed rare events are a lot more common than people expect – in fact, if you look back over the last 50 years or so, on average these ‘storms’ are happening every fifteen years.
“This tail risk doesn’t harm time-weighted returns; it is only harmful when investors need to live off their savings and redeem during these periods.
“Retirees can be the most acutely affected because of their outsized reliance on their investments to fund living expenses – their necessity to draw down on a monthly/quarterly basis.
“To help investors sleep easier at night, tail-risk hedging can provide immense value in terms of improving outcomes, and it makes sense to position portfolios to manage this,” Mr Macleod says.