Moneywise First 50 Funds: The investment outlook for 2018

12 December 2017
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From market jitters caused by Brexit to stock market highs, 2017 has been an unpredictable year for investors. But what does 2018 hold? Moneywise’s Helen Knapman quizzes some of the managers of our First 50 Funds for beginner investors to find out their predictions.

Rising interest rates pose one of the biggest challenges to investors in 2018, according to the managers Moneywise spoke to.

UK interest rates rose in November 2017 from their historic low of 0.25% to 0.5%, while the Federal Reserve in America is expected to continue pushing rates up.

Jacob de Tusch-Lec, manager of the Artemis Global Income fund, says he “expects interest rates to edge higher, as the global economy is improving and central banks are itching to (partly) normalise the current extremely loose conditions”.

However, he believes rising interest rates and the tightening of liquidity could be bad news for ‘defensive stocks’ – companies in the tobacco, utilities or consumer sectors, which sell or make products that are always needed. This could negatively impact the dividend – or income – these companies pay to investors.

Bruce Stout, manager of the Murray International Investment Trust – another global equities fund – also warns that dividends could take a hit in 2018.

“One of the biggest challenges for the developed world, particularly the UK, is corporate dividends,” Mr Stout says. “A lot of companies are really straining to pay their yields and that’s evident in the UK’s dividend coverage ratio, which is below 1% for the FTSE 100 and FTSE 250.

“These companies are paying out more than they earn, and while this is possibly sustainable in the short term, it’s not in the long term. Businesses are also being starved by paying out dividends and not reinvesting.”

Giles Hargreave, joint manager of Marlborough UK Micro-Cap Growth fund, adds: “If the Bank of England does raise rates faster and higher than is comfortable for businesses and households, then that would be a cause for concern.

“For example, if people start to feel the squeeze, then they may put spending plans on hold for ‘big ticket’ discretionary items such as cars and televisions.”

This lack of spending would have a negative impact on those investing in companies producing these products.

The impending exit from the European Union is also still a cause for concern for those investing in UK-listed companies, according to Neil Hermon, manager of the Henderson Smaller Companies Investment Trust.

“In terms of what could go wrong, we have the issues around the UK slowdown and Brexit uncertainty, and what impact that might have on consumer confidence. The UK economy is growing quite slowly, which is a drag on corporates.”

Meanwhile, Job Curtis, manager of the City of London Investment Trust, points to the risk of new companies disrupting markets. He says: “One must be careful to watch the effect of disruptors on an industry, such as Amazon in retailing.”

When it comes to investing in emerging markets, Nick Price, manager of the Fidelity Emerging Markets fund, says China could be a cause for concern. He explains: “Risks would be a major fall-off in demand from China in commodities and the resumption of a strong dollar.”

A chance to make money

However, the investment outlook isn’t all doom and gloom. According to the fund managers Moneywise spoke to, there are still plenty of opportunities to make money.

For investors in UK-based firms, Mr Curtis says: “Synchronised growth across the world’s major economies is set to continue, which should be positive for company profits and dividend growth.”

 Mr Hermon continues: “The underlying corporates [in my fund] are performing well. I also think there’s potential for mergers and acquisitions as we’ve seen this pick up in our portfolio in the past few months and we’re seeing interest from foreign corporates buying UK companies.”

Investors in UK firms which earn money and pay dividends in dollars will also continue to benefit from weak sterling, according to Mr Hermon. He says: “Sterling appreciation has proved a boon for companies with overseas earnings and export sales.

“I’m not a currency expert, but we’re certainly one of the slowest growing developed economies in the G7, we have a pretty weak – effectively a minority – government, and lots of uncertainty with Brexit. So that’s not a cocktail for me where sterling will improve, which means we should still benefit from currency valuations in 2018.”

Pockets of growth

There are also plenty of smaller UK companies where investors can gain growth, says Mr Hargreave. “One of the big positives for us continues to be the sheer number of opportunities in the UK smaller companies’ arena. We have well over 1,000 companies to choose from and many of the strongest are real innovators, tapping into new markets or stealing a march on more established competitors.”

When it comes to investing globally, Mr de Tusch-Lec, says: “Europe might still be mired in political uncertainty, yet it is seeing the strongest growth in close to a decade. House prices are rising and we are seeing signs of wage growth and shortages of skilled labour in the ‘core’ eurozone economies. Demand for credit is rising and loan growth accelerating. China is growing and commodity prices are rising, although there are signs of a politically motivated slowdown coming.

“Furthermore, recent quarterly earnings seasons have been extremely positive – even the analysts and investors perpetually anticipating deflation and recession must accept that.”

Mr Stout points to emerging markets as an asset class where there is money to be made. He says: “I’m always looking for a tailwind, and a lot of the tailwind in emerging markets is that interest rates are coming down, levels of debt are lower, and consumer spending is on the rise.”

His recent purchases include Indocement (a cement company in Indonesia), Siam Commercial Bank in Thailand, and Telefonica Brasil (a telecommunications group in Brazil).

When it comes to emerging markets, Mr Price adds that there are opportunities in the ecommerce and financial services sectors. He says: “I envisage that consumer-related areas of the market will continue to offer many sound investment opportunities.

“Companies that operate in ecommerce and financial services are good examples of pockets of the developing world where structural growth is evident as more and more consumers move online or seek bank accounts, loans and mortgages.”

He also likes India. “Some of the most fragile economies in the developing world also look more stable today than in the past and in large economies, such as India, significant government reforms should help to place the economy on a more sustainable footing for the medium to long term,” he says.

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