Gallery: Whitechurch's Top Ten Investment Themes Heading Into 2018

1. White Noise – Political uncertainty influencing investor sentiment 

Political uncertainty will continue to influence short-term investor sentiment in 2018, but we will leave it to others to predict the daily twists and turns of President Donald Trump's tweets, or second guess whether there will be a Brexit deal or no deal, and trade on short-term stock market sentiment. 

There are opportunities to be had from political noise. If we see extreme sentiment over the political environment mispricing assets this will influence our portfolio positioning; overweight Europe and underweight US continues to be a trade that remains in place for Whitechurch heading into 2018.

2. The Long (Un)winding Road – Central bankers will be the drivers in 2018 

It is central bankers, rather than politicians, who we will be paying more attention to as the long un-winding road of quantitative easing comes to the fore. We believe interest rate policies both at home and overseas will be key in dictating how investment markets perform in 2018. 

The Whitechurch strategy is based on the central case scenario that any interest rate increases are likely to be cursory due to a lack of sustained inflationary pressure, and the risk of higher rates derailing the recovery of highly indebted economies.

3. The Times They Are A-Changin' – Where to find value in bond markets in a rising rate environment

We do not see bond prices collapsing. With economic growth fragile, high political uncertainty and inflationary pressure likely to subside, we see little scope for material increases in the UK and it may be a case of "one and done" from the Bank of England.

Going into 2018, we continue to prefer corporate bonds and particularly funds investing in special situations such as bonds of financial companies.

We also believe a global approach makes sense when investing in bond markets with economies at different states of the cycle.

4. Higher Than The Sun – Investing when stockmarkets are trading at record levels

We remain towards the higher end of our equity weightings. But with stockmarket performance having been positive for such a sustained period, this does mean it is important to not be complacent.

Our favour is to invest with managers who are focused on seeking value and those who produce their best relative numbers in falling markets.

Companies that can provide attractive and growing dividend streams will remain sought after as equity yields remains significantly higher than bonds and cash.

However, we have been taking profits in areas that have seen particularly strong performance and investor sentiment is showing signs of euphoria.

5. Heaven Knows I am Miserable Now – Are investors too pessimistic over UK equities?

Yes, Brexit-focused white noise will remain a headwind, but UK equity valuations do not look stretched compared to previous market peaks and the reluctance to invest based on political noise has seen UK equities look particularly cheap on a number of valuation metrics against global equities.

We see opportunities in the UK stockmarket in 2018, and we maintain a focus on defensive UK equity income funds that invest in multinational, blue-chip stocks.

6. It's The End Of The World As We Know It – Managing the risks of Corbynomics

We cannot second guess politics, but at present the probability of a 2018 General Election is fairly low. But if this probability increases, then this would be a reason to fundamentally alter our investment strategy, given that the odds of Labour (led by Jeremy Corbyn) getting the most seats is more than 50% and the impact would be high on asset prices.

Our contingency portfolios would see a significant increase in overseas exposure across all asset classes.

Photo: Sophie Brown/Creative Commons CC BY-SA 4.0

7. All Around The World – Global diversification makes more sense than ever

We see many bright spots to invest overseas in 2018. Japan appears to us to be one of the lower risk overseas markets. Valuations are undemanding and it offers a stable government and easy fiscal and monetary policies.

Asian and emerging markets have performed strongly this year and we continue to favour exposure here both in equities and bonds. A weak dollar and a recovery in commodity prices has been supportive.

However, a key question is whether the Chinese authorities are able to manage sustainable growth without it leading to debt defaults. This needs to be monitored carefully in 2018.

8. Pounding – Managing currency risk

For sterling, the strength of the pound will be largely determined by ongoing political uncertainty. Although it does look historically cheap, a worsening Brexit outlook could see it test the lows of 2016.

Our overseas exposure is unhedged going into 2018. This provides protection from Brexit and Corbyn risks. However, it also provides insurance if risk aversion increases as the UK is not seen as particularly stable so the pound could weaken if investors go into risk-off mode.

If we do see the pound fall further on overly negative sentiment, we would take the opportunity to hedge some overseas exposure.

9. Do Not Look Back In Anger – Investing in areas that have underperformed

With rising rates a key risk in 2018, and traditional bond markets not providing protection from an inflationary shock, it will be important to have an increased level of diversification and one sector to consider is absolute return funds.

Many of these have seen disappointing past performances. But with bonds and equity valuations looking expensive in many areas, it seems to be that this is exactly the time when these strategies cannot be ignored.

10. Reasons To Be Cheerful – Why a stockmarket crash is unlikely in 2018

If rates stay low for longer than average and US rates peak at about 3% (well below the long run average of 5%), shares remain relatively attractively valued versus other asset classes.

Certainly if you want to make a return in 2018, the 'TINA' acronym applies: There Is No Alternative than to buy risk assets to make a return above inflation.

Although the political backdrop remains fraught with uncertainty, the global economic backdrop of synchronised growth and historically low interest rates is traditionally a supportive one for stockmarkets, so maybe it is not quite time to run for the hills.