Concerns around the consequences of geopolitical risks tend to be top mind for any investor with a global approach. But 2018 could be different. According to Excel Funds chief investment officer Christine Tan
, keeping a close eye on central bank activity and how it impacts the global yield curve and asset prices is the top priority for 2018.
“From a geopolitical perspective, I don’t see anything very problematic other than North Korea,” Tan said. “And, even with North Korea, it’s not really about them. It’s more about the bigger countries involved: the US and China. However, as always, an increase in geopolitical tensions - or simply ‘noise’ - could change the risk appetite.”
Despite global growth gradually creeping toward the 3% mark - the “magic number”, as Tan puts it - inflation remains soft. If conditions remain the same, Tan believes it likely that central banks will remain relatively dovish. However, she does think this stance could change.
“What if for some reason oil prices suddenly spiked back to $70 or $80 and inflation suddenly picked up along with the global yield curve,” Tan said. “That would change the valuation of equities around the world. Even US equities are priced as they are because of the low yields; there are no alternative investments for investors right now.”
Tan’s main focus is emerging markets and in the current environment she remains focused on visible growth sectors, like technology, education and autos, which, due to low penetration, is not considered a cyclical sector in emerging markets.
“If, in the next 12 months, global growth suddenly picked up and inflation looked like it would get close to 2 or above, then we would start rotating into the more cyclical sectors, like materials and energy,” Tan said. “But, until then, we are focused on quality growth.”
FAANG stocks may have grabbed the headlines in 2017, but emerging markets also had some blockbuster tech performers. Both Alibaba and Tencent achieved earnings that Tan described as “nothing short of spectacular.” While Tan still favours technology in EM, she does urge investors to tread carefully.
“Technology is richly valued, reflecting its growth, so you need to be more cautious in terms of putting new money there, but we do like the long-term picture,” she said. “Looking at some of the more cyclical sectors, we recently added a little to energy on the stabilization of oil, which is positive for consumers and producers. We also added little more exposure to cement and chemicals in the last year, which was part of the whole global macroeconomic picture improving.”
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