THIS time last year few people were predicting that the UK would vote to leave the European Union or that Donald Trump would be elected president of the United States. The odds on both events would have been very generous indeed.
What the last year has provided is a useful reminder that no-one, be they pollsters or investors, can predict the future, or indeed the effects of such events on markets. Even when these momentous events came to pass, the market meltdowns that so many envisaged failed to materialise. In fact, stock markets in the US and UK rallied after both events.
?Asian markets also performed well, in contrast to pundits’ expectations at the start of 2016. They pointed to mounting concerns about China’s economy, which caused the stock market to fall by around 20 per cent at the start of last year.
Meanwhile, commercial property, which had been the asset class of choice for the previous three years, came off the boil as valuations continued to climb and investors became nervous about life after Brexit.
Not many investors will have got all of these calls correct. To time markets and to successfully bet on their direction on a consistent basis is nigh on impossible.
For the majority of investors, a better approach is to construct or invest in a diverse portfolio of shares, bonds, property and alternative investments. The advantage of this approach is that it smooths out the peaks and troughs, leading to far more consistent returns.
And, although I have just pointed out the difficulty in making predictions with any certainty, there are a few themes I am confident will play out over next few months.
It is hard to predict their direction, but markets will be volatile. Brexit negotiations, elections in Europe and Trump's first months in office will be closely followed and influence investor sentiment day in, day out. This was apparent on the day of Theresa May’s Brexit speech. Despite Mrs May’s confirmation that the UK will leave the European single market, sterling turned in its strongest day of trading for eight years.
US interest rates will climb as the economy continues its long-awaited recovery following the global financial crisis, bringing inflationary pressures.
Nonetheless, equities should have another reasonable year, despite hitting new highs in 2016. In contrast, the outlook for other mainstream asset classes - bonds and commercial property - is far from inspiring, making equities the least-worst major asset class.
Despite the recent sell-off, we think developed market bonds offer little value. However, other forms of debt are more attractive and offer the potential to produce returns similar to equity markets, but with lower volatility. This includes high-yield bonds, emerging market bonds and corporate loans.
Some of the most interesting opportunities will come from niche asset classes, which many investors may not have previously considered. Examples include renewable infrastructure, social infrastructure, peer-to-peer lending, insurance-linked securities and aircraft leasing. These asset classes are capable of providing secure sources of income, which are often uncorrelated to mainstream investments, such as equities and bonds.
As such, they provide excellent sources of diversification and can help smooth investment returns. While not all will flourish, I predict we will see much increased interest in these ‘alternative’ assets during the coming year.
My predictions for 2017 may turn out to be wide of the mark and as ever we can expect the unexpected. But by sticking to my principles and investing in high-quality assets within well-diversified portfolios, I’m confident that it will be possible to deliver competitive investment returns, whatever 2017 has to throw at us.
Mike Brooks is head of diversified multi-asset strategies at Aberdeen Asset Management.
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