No sooner has the dust settled on the political and economic storms of last year, then we are preparing ourselves for 2017, facing two major consequences of last year’s public votes: the inauguration of Mr Trump in America on 20th January and the triggering of Article 50 in the UK before the end of March.
Few people would have predicted at the beginning of last year that the rise of nationalism in some developed economies would have led to two such extreme democratic outcomes with a period of uncertainty ahead. Add into the mix numerous European elections scheduled for the next 12 months, an Italian banking system under pressure, increasing inflation forecasts and prolonged low interest rates putting pressure on pension funds, and it is little wonder that investors are questioning where they should be investing in 2017.
With equity markets, particularly in the US, looking over valued and therefore not adequately compensating investors for the potential risks and unknowns, investors must adjust to a world of modest returns where it is important to ensure the right country and sector allocation and to be nimble when making portfolio decisions. The years of simply buying, holding and reaping double digit returns are sadly no more!
In the short term, after a strong start to the New Year, we envisage a pullback in global markets which should present some opportunities for investors in certain areas. The small company arena could outperform if the retreat from globalisation to a more domestically focused strategy continues, as small companies are usually domestically positioned, irrespective of their domicile. We see some interesting opportunities in the biotechnology sector which tends to be dominated by smaller dynamic companies. On a wider sector basis, biotech remains considerably cheaper than 18 months ago. In America, small caps also stand to benefit if Mr Trump proceeds with his proposed corporation tax cuts and reduction in red tape.
A non-equity investment that has traditionally acted as a hedge against loose monetary policy, rising inflation and geopolitical and economic uncertainty, is gold. Given the unprecedented events which we face this year, we suggest that we remain in a gold-friendly environment. Gold has weakened by some 8% since the US election as equities have been strong and we advocate a modest position in gold in portfolios whilst the dollar is at its current level. However, any further strengthening in the dollar could well undermine the gold price, triggering a review of the position.
As opposed to waiting for the storm clouds of 2016 to fully disappear, or even treading water until the hurdles of the first quarter of 2017 have been cleared, we believe that investors could benefit from opportunities presented by these events. Active portfolio positioning now will ensure that investments have the potential to stand up to even the most unexpected outcomes that this year has to offer.