Last year, fears of a global recession caused a sharp increase in risk aversion around the globe. However, after a rough start, 2016 ended on a positive note with hopes of a reflation of the global economy as the anticipation of a better balance between monetary and fiscal policy resulted in an increase in bond yields and commodity prices. What have we learned from 2016? Portfolio managers look back at 2016 and reveal their resolutions for 2017.
Ewout van Schaick, Head of Multi-Asset Portfolios at NN Investment Partners and Lead Portfolio Manager of the First Class Multi-Asset fund:
Risky asset markets have started 2017 on the same positive tone as they ended in 2016, driven by better economic data and the expectation of more expansionary fiscal policy. The key investment trends over the last few months have been for higher equity prices, higher sovereign bond yields, tighter credit spreads, a stronger US dollar and a rotation from low volatility into more cyclical equities. These trends that started after the Brexit referendum and even strengthened after the US election, will probably continue for some longer.
2017 will definitely bring more excitement. It is to be seen whether the Trump administration will be able to deliver on the high fiscal expectation or whether it will translate the anti-globalization rhetoric into more damaging actions. Political risks will pop up from time to time, especially in Europe where we have a full election agenda starting in the Netherlands on March 15. At the same time Emerging markets, having to deal with a higher USD and higher US rates, might become sensitive to negative capital flows which can create some market volatility.
We will continue to position our portfolios in such a way that we benefit from existing trends and the stronger economic backdrop, while trying to limit downside risk from unexpected events. Last year we managed to generate attractive returns with limited portfolio volatility. We will be happy to repeat it this in 2017.
Sebastiaan Reinders, Lead Portfolio Manager, US High Yield at NN Investment Partners: Our new year’s resolution: capitalize on investment opportunities coming from the inevitable volatility ahead of us by positioning our portfolios for it now.
Into year-end, financial markets implied lower and lower volatility – this has continued into the first week of 2017 and many other risk appetite indicators, such as economic growth and inflation, are flashing green again as well. While our belief is that 2017 will be a good year for high yield investors, we also find current valuation levels do not currently compensate for the risks. We believe unexpected events are coming and will create opportunities this year. And although it is always difficult to tell when these opportunities will present themselves, we are ensuring that our portfolios are ready to benefit.
The market can be woken up from its complacency very quickly and in many different ways, but for now we see the two most likely as Trump and interest rates. If the consensus view of strong economic growth resulting from the Trump administration’s policies is wrong and growth does not accelerate, we could see high yield as an asset class underperform. We are at unchartered territory again and believe credit selection will be highly important.
In the case growth disappoints, high yield will look expensive, bond price dispersion will likely increase, and more opportunities for investors with a focus on credit selection will arise. In case growth accelerates more quickly or a lot of financing needs to be done to finance fiscal policy, interest rates are likely to move up more rapidly. High yield will benefit here as credit spreads can act as a buffer to mitigate rising interest rates, although we are cautious on the lower starting point for spreads this time. While we do not expect another year of the phenomenal returns high yield experienced in 2016, US high yield is set up to perform well and generate coupon-like returns in 2017. Managers with a focus on robust research and credit selection are in the sweet spot to benefit from these events. Beta positioning will matter of course in 2017, and we are positioning for this, but credit selection will prove to be critical.
Hans van Zwol, Senior Portfolio Manager, Global Fixed Income at NN Investment Partners: Over the past 25 years, interest rates declined in a nearly straight line to the spectacularly low levels seen in 2016. From these levels there is not much room for even lower rates. Although we don’t expect a sharp rise, investors have to be prepared that the high returns of the past decades will no longer be so obvious.My resolution for 2017 is to, together with my colleagues, continue helping our customers as much as possible to deal with this potentially challenging fixed income environment by building the best possible bond portfolios, but also to respond with appropriate advice.
Nicolas Simar, Head of Equity Value at NN Investment Partners: Global growth is likely to gain momentum and we expect the Reflation theme that started last year, to continue in 2017. Rising inflation expectations and rising long term bond yields have triggered a significant change in leadership in the equity market, favoring the Value style. We believe that this rotation offers great opportunities for our value focused dividend strategy. In the dividend space the stretched valuations of popular defensive, low volatility stocks (fi. real estate, regulated utilities and consumer staples) appear vulnerable as bond yields rise, while the steepening yield curve should benefit banks and insurers. Combining dividend yield and dividend growth is the only way to survive in this new reflation regime and our portfolios are well positioned for this.
Jasper van Ingen, Senior Portfolio Manager Convertible Bonds at NN Investment Partners: As an investor in convertible bonds, the odds are skewed in your favour. This is not a magic trick, just a result of the fact that you gain more from a positive move in a particular underlying equity than you stand to lose from a negative move of the same magnitude. This is called positive convexity. This positive convexity can be a very powerful tool in generating attractive risk adjusted returns in the long run. Also, it is even more powerful in volatile markets. And volatile markets are what we expect for 2017.
Looking back at 2016 we were reminded of a few important basics of investing: the importance of geographical diversification, currency hedging and most importantly to expect the unexpected. Like in 2016, there are plenty of things to watch in 2017: elections in Germany and France, the unfolding of the Italian banking crisis, the first steps of the Trump administration and the rate path of the Federal Reserve to name a few. It is human nature to overestimate the degree to which we can predict things: let’s not make that mistake this time around. Instead of trying to predict the outcome of binary events, lets focus on identifying companies that generate cash and stand to benefit from benign secular trends of which there are plenty.