Staying invested, diversifying and hedging is the best way to protect and grow your wealth
A wave of populism and anti-globalisation sentiment appears to be resetting the tide of global economics, leaving investors highly uncertain about their portfolios in 2017. Mr Donald Trump's victory in the US presidential elections has unnerved the country's trade partners and allies while Brexit negotiations and widespread euroscepticism continue to define elections on the continent.
In a year bound to be defined by politics, one investment philosophy will remain paramount: Do not panic. Our research suggests the portfolios of those who chose to de-risk US equity positions and missed the top 10 trading days from 1989 to 2013 would have been 50 per cent weaker compared to those who stayed invested.
So where are the opportunities? And what is the best positioning to trump Mr Trump and the other factors looming in 2017?
NAVIGATING IN THE POST-TRUMP WORLD
The question on everyone's mind is what a Trump presidency will look like. There are three key areas that deserve investors' focus: the promise of expansionary fiscal policy; the pledges to enact pro-business policies, lower corporate taxes and reduce regulation; and the threat to trade and immigration.
In general, more expansionary fiscal policies and pro-business legislation should prove supportive of US equities overall.
As inflation expectations re-price, Treasury inflation-protected securities should benefit while US equity sectors such as defence, construction, energy, financial services and pharmaceuticals should outperform on the policy tilts of the new administration.
The more pressing topic for global investors is Mr Trump's trade stance. He has vowed to undo the trade policy framework, which could mean renegotiating or withdrawing from deals like the North American Free Trade Agreement (Nafta).
While this topic will stir up volatility, we think these concerns are overdone - the Republicans in control of Congress remain largely committed free traders. The overall policy mix, if it results in stronger US growth and inflation alongside better commodity prices, means the earnings revival under way in most emerging markets will likely endure. We remain overweight on emerging market (EM) equities - our preferences are India, China, Brazil and South Africa - and a basket of EM currencies that includes the Brazilian real, the Indian rupee, the Russian ruble and the South African rand.
IS ANTI-GLOBALISATION A THREAT TO INVESTORS' WEALTH?
Nearly three decades of unbridled globalisation have left deep socio-economic rifts in many Western economies. Protectionism is on the rise across Europe and the United States, with Group of 20 (G-20) nations issuing the most restrictive trade measures since 2009.
Protectionism increases the risk for investors in small, open economies dependent on large trading partners. Competitive devaluation is another risk as countries attempt to lift growth by devaluing their currencies. Slower trade is bad for growth, and as political risks proliferate, investors may feel more inclined to keep money closer to home.
Counter-intuitively, as the world economy becomes less global, investors need to become more global. Diversification across regions and asset classes and currency hedging are the best tactics to withstand some of the anti-globalisation-related risks.
Singapore, as a trade-dependent economy, is highly vulnerable to a further slowdown in global trade; value-added exports represent 56 per cent of Singapore's GDP, the highest in Asia. Also, Singapore's interest rate is closely correlated to the US' - a further rise in Singapore dollar yields is likely as the US Federal Reserve gradually tightens its monetary policy. Banks are beneficiaries while select Reits with cyclically exposed assets and acquisitive growth opportunities could outperform.
THE CHINA CONUNDRUM: ARE THE OPPORTUNITIES WORTH THE RISKS?
"Investing in China" and "hard landing" were inseparable terms throughout much of 2016. China began the year with a massive equity sell-off on fears of swift currency depreciation that rattled markets worldwide. And several key issues remain in 2017.
China's property market appears to be overheating as prices in tier-1 cities climb to nearly 30 per cent year-over-year; Shenzhen is now the most expensive city in the world on a price-to-income basis.
The yuan continues to depreciate - we forecast US$/yuan at 7.00 or higher in six months. And China's financial leverage remains a favourite topic among the bears - its debt-to-GDP ratio has risen from 150 per cent before 2008 to around 250 per cent today.
But with a US$260 billion (S$370 billion) current account surplus, a captive domestic savings base and a largely closed capital account, policymakers have the ability to supersede market forces and stem any potential capital flight. We believe select opportunities are worth the risks in 2017. For example, the Stock Connect programmes should support small and medium-sized Chinese firms listed on the Hong Kong Exchange. And sectors that benefit from the changing composition of China's growth, like healthcare, tourism, the Internet and entertainment, are expected to grow at above-average rates.
HOW TO ACHIEVE 5 PER CENT RETURNS IN 2017
Ten years ago, generating returns above 5 per cent was relatively simple. Today, with interest rates still likely to be held down by the forces of ageing demographics and excess savings, the search for yield among private investors is likely to endure, especially if inflation rises faster than interest rates as we expect. Assuming a suitably high risk tolerance, investors can consider these three ways to boost returns.
First, selectively invest in riskier assets. We prefer US and EM equities, US senior loans and select EM currencies. Second, consider leveraging a well-diversified portfolio to improve returns as interest rates are likely to stay low by historical standards; the investment time horizon needs to be carefully considered. And third, seek alternative risk premiums in non-traditional assets, such as hedge funds and private markets. We forecast 7.2 per cent annual returns over the next 10 years for a balanced portfolio with a 40 per cent allocation to hedge funds and private markets.
The only certainty in 2017 is uncertainty and the inevitable flare-ups of volatility. Different countries will choose different paths and see different outcomes, many of which will re-shape the way investors view the financial market. In the end, staying invested, diversifying and hedging is the best way to protect and grow your wealth is the year ahead.
The writer is the Apac regional head at the chief investment office of UBS Wealth Management.
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