2018: which asset classes could continue to defy gravity?

With both equity and bond markets showing no signs of letting up their stellar gains, it has become a real challenge for investors to pick the market areas they they believe still have further to run.

That’s not to say that investors are piling into cash and heading for the hills, though. FundCalibre’s latest poll, for instance, found that investors remain positive on equities, with 41 per cent of participants favouring global funds and 32 per cent turning to Asian or emerging market equities.

In the below article, Darius McDermott, managing director of FundCalibre, identifies three equity and three fixed income market areas which he believes could continue to fare well in 2018.

1. Emerging market equities

Despite having done well this year, we believe many areas within emerging markets are attractively valued relative to many of their developed market counterparts.

We think James Donald, who heads up the Lazard Emerging Markets fund, is particularly adept at seeking individual opportunities within such a broad area of the market. For those who want to tap into the growing dividend opportunities Charlemagne Magna Emerging Market Dividend is also worth a look.

2. European equities

Improving economic growth, increased political stability and falling unemployment levels have bolstered sentiment in Europe, with M&A activity in the region picking up and IPOs continuing to come to market. That said, there are still pockets of value which can be captured by selecting the right managers.

One European equity fund we particularly like is David Walton’s Marlborough European Multi-Cap. While it is overweight smaller companies relative to the broader index, it has a highly diversified portfolio of stocks in a bid to minimise volatility. Mirabaud Equities Europe ex UK Small & Mid is another option.

3. Japanese equities

While the Nikkei 225 has indeed performed well this year, it’s still around 40% below its long-term peak. Japanese equities have remained unpopular among UK investors in particular, who have been told one too many times that ‘this time it is different’. However, fresh from a landslide election victory, Japanese prime minister Shinzo Abe can continue with his business-friendly reforms. Baillie Gifford Japanese fund is worth a look, as is T. Rowe Price Japanese Equity.

4. Short duration corporate bonds

Given that central bank tapering appears to be on the cards in some regions, investors would do well to exercise caution the fixed income space and minimise interest rate risk.

Short-duration bond funds – which hold bonds that are close to maturity – could be an attractive option. We particularly like AXA Sterling Credit Short Duration Bond, which will only invest in high-quality corporates with maturities of less than five years. Manager Nicholas Trindade also structures the portfolio so that it is well diversified and that around 20 per cent of the holdings mature each year.

5. Emerging market debt

In today’s low-yield environment, emerging market debt looks particularly attractive given its superior ability to generate income. Within this space, Claudia Calich’s M&G Emerging Markets Bond fund, which is able to invest in both hard and local currencies as well as a combination of both government and corporate bonds, is a newly rated fund which currently yields 4.9%*. We also like Aberdeen Emerging Markets Bond with its 5.2% yield*.

6. Floating rate notes

Floating rate notes are bonds which have a variable coupon; this is determined by adding the bond’s spread to its reference rate, for instance LIBOR or the Consumer Price Index (CPI).

A fixed income fund we like uses floating rate notes is Ariel Bezalel’s Jupiter Strategic Bond fund, which currently has a 12.3 per cent weighting to the asset class. Likewise, GAM Star Credit Opportunities managers Anthony Smouha and Grégoire Mivalez have long been fans of floating rate notes. They have 43.3% in ‘fixed-floater bonds’ which provide a fixed interest for a specified period and then float at a spread over a specified benchmark, which is regularly re-set and can move in line with interest rates.

*Source: FE Analytics, 30 Nov 2017

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author and any people interviewed are their own and do not constitute financial advice.