Identifying a standout asset class in 2017 is challenging because of the dramatic influence that lower bond yields have had on asset valuations over the past year.
Most asset classes – bonds and equities – are already expensive and could be challenged if bond yields continue to rise through the year.
One of the most critical issues that investors need to look out for is the extent to which bond yields rise further.
In such an environment, having some cash on the sidelines – both for downside risk protection and buying power once assets get cheaper – would not be a bad option. Investors might also consider equity-related exposures that provide some downside protection, as is possible via the ASX.
Rising bond yields also imply a likely sector rotation out of the long popular defensive yield plays such as utilities, listed property and telecommunications, and towards sectors with solid earnings potential, such as US technology, which can be accessed locally through a NASDAQ 100 exchange traded fund (ASX: NDQ).
Unloved global banks should also do well, as rising global bond yields make it easier for them to make money.
In Australia, banks have largely been neglected over the past year and also offer relatively good value, especially if stubbornly low inflation causes the Reserve Bank to cut interest rates further.
Apart from rising bond yields, relative currency movements are another factor investors should watch out for.
Rising US interest rates and a likely easing back in commodity prices suggest risks to the Australian dollar remain to the downside, meaning some unhedged exposure to international assets – equities or simply foreign currencies, such as via a US dollar ETF – would be prudent.
A rising US dollar should also favour the European and Japanese equity markets, as a weaker euro and yen should improve the export competitiveness of their economies. Hedged currency exposure to both these markets is also possible via the ASX.
As always there will be myriad political risk factors to occupy investors’ minds, such as how the new US president deals with Congress, the rise of anti-EU nationalist parties across Europe and any potential leadership threats to prime minister Malcolm Turnbull. And while China’s economy continues to chug along, rising debt levels and overcapacity problems suggest an element of caution is still warranted with regard to commodities and the resources sector in general.
David Bassanese, Chief economist, BetaShares
Property: A-REITs have had such a great run – is this set to continue or can we expect a downturn?
The A-REIT index has provided an annual 19.58% return over five years. So is the sector still likely to outperform?
Well, since the GFC average gearing is down to 28.5% (compared with 40% then), the focus has returned to property management and exposure to overseas property has dropped nearly 50%. So the sector has returned to what it does best.
However, the biggest difference is the comparison of forecast dividend yields at 4.6% compared with the 10-year government bond rate of less than 2%. Before the GFC the comparison was 5.6% versus 6.05% respectively.
You will continue to see some weakness on any rise in interest rates but if you concentrate on the fundamentals of the sector – the lower gearing, low vacancy rates across the main retail and office markets in NSW and Victoria, and low bond rates – then it would be prudent to maintain or build your exposure to the A-
REIT sector as a long-term investment, but remain well diversified.
Director, Verante Financial Planning
ETFs: It’s been another big year for ETFs and smart beta has become a big thing. What else is coming?
Competition between funds and the variety of product offerings available reflect an ETF market that is already highly dynamic. But the biggest developments may yet lie ahead. Product flexibility, low cost and transparency continue to appear to drive interest, and now active fund managers seem keen to access another distribution channel.
Following in the footsteps of Magellan, AMP Capital has formed an alliance with BetaShares to launch a range of exchange traded managed funds aimed at the SMSF market. This trend is likely to continue, as major names recognise the potential benefit of making popular funds available to a wider audience.
Smart beta products have proven popular overseas and are now being launched in Australia. These developments may provide greater transparency to the funds management industry and may offer new ways for self-directed investors to blend their portfolios without sacrificing control.
Michael Elsworth, General manager, alternatives and specialised research, Lonsec
Technology: What disruptors have stood out in 2016 and what can investors expect in the new year?
Automation in the financial services sector is disrupting the way people invest and traders work. For stock traders and firms, the standout development in 2016 was the expanded use of analysing software, such as Kensho, that delivers daily market predictions and analysis reports. The use of software such as this is only likely to increase.
On the investor side, new technologies and robo-advisers have enabled small, self-managed investors to better track and automate portfolios. Start-ups are also emerging, changing the way Australians invest. One such start-up invests customers’ spare change automatically into a diversified portfolio.
In 2017, Australia is likely to see disruption in how we pay for goods. Apple Pay on the iPhone is already available for customers from one bank, with the others expected to negotiate and implement similar technology in coming years. One-card systems that allow people to use a single card for everything from public transport to groceries are already used internationally.