2017 investment themes
Here, we explore some ideas self-managed super fund (SMSF) investors might take into consideration for 2017.
With so many moving parts in the global economy, identifying emerging investment themes is challenging. But while there are many unknowns in investment markets in 2017 such as US policy direction, there are certain themes that are already coming to light.
Interest rates on the move
The change in direction in the interest rate cycle is likely to be one of the main themes for investors this year. It’s likely rates in the US and, later in the year Australia, will increase.
Says Damian Liddell, a financial adviser with Browell’s Financial Solutions: “thinking about the knock on consequences of rising interest rates in the US and the fiscal stimulus from a Trump administration is really important for investors next year.”
As US interest rates rise, its currency is also likely to rise. At the same time, the Australian dollar is likely to fall if the Reserve Bank of Australia does not raise rates at the same time. SMSF investors should factor dynamics such as these into their investment decisions.
Expect bumpy markets
Pete Pennicott, a director and financial adviser with financial advice firm Pekada, notes that markets are likely to be more volatile this year than investors have experienced in recent times.
“Volatility may be a new experience for investors who have only recently begun their investing journey. We are currently seven years into a bull market. So investors who started investing after the financial crisis are yet to experience a bear market,” he says.
The ASX 200 experienced its most recent bottom in March 2009 when it hit 3145.5 points. Recently it has traded at about 5,500 points. A bear market can be defined as a market that has experienced a fall of 20% or more.
“Opportunity in the form of volatility is sure to knock, but it’s important for investors to be prepared,” Pennicott explains.
This means having the cash accessible to invest in cheaper assets as their value falls. It also means having a mindset in which you are comfortable to invest, even when asset prices are falling. This can be challenging for investors and whether this approach is right for you will depend on your appetite for risk and your SMSF’s investment strategy.
“We are likely to experience continued market volatility in 2017, and it is not hard to see why,” Pennicott says.
One risk is a further reduction in Chinese growth. Chinese economic growth was 6.7% for the September 2016 quarter. The OECD expects it to decline to 6.1% by 20181 . Should China’s economy deteriorate substantially this will result in reduced demand for local resources.
Another risk is the consequences of Britain’s decision to leave the European Union. Details about ‘Brexit’ remain sketchy. But reports suggest talks between the EU and UK could start by 31 March next year2.
Says Pennicott: “Whether it be China growth stumbling, Brexit, or the US economy under a Trump presidency, it is clear to see that the level of uncertainty will be on the rise. In investment markets uncertainty equals volatility in prices.”
He says there’s no reason to fear volatility. “It’s a source of opportunity. If there were no corrections, bubbles popping, crashes or sell-offs, then there would be no risk to investing and subsequently no return to be made.”
Portfolio management key
Portfolio management becomes vital in periods of high volatility so assets are properly administered.
“Good portfolio management means you are seldom fully invested, and usually have some cash available to take advantage of short-term market mispricing and buy good businesses on sale,” Pennicott notes.
Overall, it’s likely 2017 will present periods where share prices will fall significantly at either a company or business level. But there will also be periods where share prices and markets will rise. Any gains SMSF investors make will come from correctly determining if a situation is an opportunity or a case of buyer beware.
The idea is to be patient and have access to quality research. Says Pennicott: “Once you have done the right research then back your judgement and ignore the noise and make your investment decisions.”
1 OECD, China - Economic forecast summary, November 2016