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2017 Outlook – The Investment Themes to Watch

2016 was a year of erratic markets and geopolitical shocks that sent fundamentals into the shadows. Bourses moved on speculation and surprise, challenging market participants. GAM’s investment experts put forward their key themes for the year ahead.

19 December 2016

2017 Themes Active

The Return of Active Management

Larry Hatheway, GAM chief economist and Head of Investment Solutions

Index-hugging equities are unlikely to deliver in 2017, driving the return of active management. Pseudo-active investment strategies that follow the herd and shy away from conviction bets look set to fail as the scope for general market gains is small compared to the more pronounced divergence of returns along regional, sector, style and stock-specific lines. Pockets of value exist in equity markets, but broad-brush strategies have localised gains overshadowed by the slow performance of the wider market. We are moving more towards cyclicals and the beneficiaries of currency weakness, such as the Japanese equity market, while paring back emerging-market weightings. In the fixed income universe, rising yields will undermine the foundation of risk parity.

2017 Themes Japan

Introducing VARP

Tim Love, Investment Director for emerging market equities

Vietnam, Argentina, Romania and Pakistan represent a collection of geographies, languages, histories and business cultures with one thing in common: they each offer major growth opportunities. The VARP economies are over 13 times smaller than the BRICs and therefore we do not expect them to help drive the global economy in the same way, or to generate the same levels of returns for investors. However, these markets can offer a deeper dimension to an emerging markets portfolio with potential attractive risk returns – because of their diversity.

2017 Themes Usbanks

US Bank Growth

Davide Marchesin, Fund Manager in GAM’s non-directional equity team, Lugano

We are seeing a major inflection point in the growth outlook for US banks. They are set to benefit from milder regulation, a widening of net interest margins as the yield curve steepens, and low provisions as the economy reacts to fiscal stimulus. Consequently, going long the market, particularly select regional names looks like attractive positioning. Another financial theme that is growing in prominence is the lower intervention of the US government in businesses such as student lending and mortgage insurance, where we see private players regaining market share following the contraction during the Obama administration.

2017 Themes Defence

European Defence Contractors

Gianmarco Mondani, CIO of GAM’s non-directional equity team, Lugano

We are starting to see some interesting prospects among European defence contractors. After several years of revenue declines, led by budget discipline, heightened geopolitical risks are likely to lead to better revenue prospects than the market currently estimates.

2017 Themes Convertible

Convertible Bonds

Jonathan Stanford, Senior Fund Manager in GAM’s non-directional equity team, Lugano

Convertible bonds could prove very interesting in 2017. They allow investors to gain exposure to the equity market, while owning fixed income assets, which seems a good fit for an environment in which nobody wants bonds and the majority are nervous about equities. The short duration characteristic of convertibles prevents over-exposure to rising interest rates. As a spread asset, the credit component allows for greater yield opportunities or valuation upside in a relative value arbitrage scenario. The rise in interest rates would usually call for an increase in primary market activity in convertible bonds. The comparative competitiveness toward other assets will increase, prompting companies to choose convertible debt issuance over corporate bonds or bank loans. This will allow for more diversity, a renewed pool of assets and greater liquidity. The possibility of inflation, backed by stronger economic growth, would bode well for the equity market, and thus would allow convertible bonds to appreciate thanks to their strong equity exposure, and further credit tightening.

2017 Themes Contraction

Spread Contraction

Tim Haywood, Investment Director for absolute return strategies

2017 will surely bring greater spread contraction between emerging market and developed market longer-bond yields: the former surged after the election of Donald Trump but growth prospects locally have dimmed. Conversely, developed market yields face multiple headwinds, including policy rate rises rather than cuts, less quantitative easing, more net issuance, inflation pulse in weak currency countries, fewer foreign purchases, credit rating declines and waning momentum.

2017 Themes Oilgas

North American Onshore Oil Services

Roberto Cominotto, Investment Director for energy equities

The oil & gas service and equipment industry has gone through its worst crisis over the past two and a half years, reaching the trough of this cycle in the third quarter of 2016. While for offshore-exposed companies it will still take several quarters until capacity utilisation improves, the North American onshore service industry is already picking up. US shale oil & gas producers are confident that the oil price recovery will continue in 2017 and have started to announce increased investments. Mid-cap companies specialising in servicing the oil & gas fracking industry are best placed to benefit in 2017.

2017 Themes Tutti

The ‘Tutti Frutti’ Portfolio

Scilla Huang Sun, Portfolio Manager for luxury equities

The macro environment is currently quite volatile and will remain so in 2017, with several binary political events on the horizon. Investors should bring the benefits of ‘tutti frutti’ effect to their portfolios, being well diversified from a top-down perspective (we own growth companies, momentum stocks, defensive names and ‘fallen angels’). At the same time, one must keep a bottom-up focus on companies with strong brands and cash flow generation that can gain market share. We are confident that the positive trend seen in the third quarter of 2016 will gain further momentum, and are convinced of the secular growth potential of the luxury goods industry.

2017 Themes Japan2

Equities Unaffected by Currency Moves

Reiko Mito, Portfolio Manager for Japanese equities

2017 is the time to buy Japanese companies that can grow regardless of exchange rates. The volatility of the Japanese yen is understandably a nightmare for the managers of domestic companies. Nevertheless, we are keen to invest in companies that can grow no matter how the currency moves. FX rates inevitably affect companies’ financial statements in the short term, which can be either a positive or a negative. We look beyond the short-term impact to underlying fundamentals. It is more important for us to analyse whether the impact is just the translation effect, or whether the company is eventually losing or gaining competitiveness.

2017 Themes Comeback

The Comeback of Discretionary Macro Investing

Christian Gerlach, Portfolio Manager for commodities

Like the 1970s, market volatility will spike in many markets during the next few years. The forces of populism, inflation and currency devaluations will destroy the post-2008 investing consensus (staying long low-volatility assets). As a pandemic of fat-tail events will undermine many beloved investing approaches, returns will start to cluster around the most flexible approach possible – discretionary macro.

2017 Themes Healthcare

M&A in Healthcare

Christophe Eggman, Investment Director for healthcare equities

M&A will remain a prominent feature of the sector going into 2017, and we expect to see an acceleration of this trend in the coming quarters. For many companies M&A is a necessity – not just an option – in order to grow, and a way to offset a potential loss of pricing power. Deal drivers include large cash balances, repatriation of offshore cash back to the US, attractive acquisition targets, the quest for growth and lower tax rates. Another performance catalyst is Trump’s proposed corporate tax reform, including a repatriation bill for offshore assets, which will certainly accelerate capital deployment.

The Return of Active Management

Larry Hatheway, GAM chief economist and Head of Investment Solutions

Index-hugging equities are unlikely to deliver in 2017, driving the return of active management. Pseudo-active investment strategies that follow the herd and shy away from conviction bets look set to fail as the scope for general market gains is small compared to the more pronounced divergence of returns along regional, sector, style and stock-specific lines. Pockets of value exist in equity markets, but broad-brush strategies have localised gains overshadowed by the slow performance of the wider market. We are moving more towards cyclicals and the beneficiaries of currency weakness, such as the Japanese equity market, while paring back emerging-market weightings. In the fixed income universe, rising yields will undermine the foundation of risk parity.

Introducing VARP

Tim Love, Investment Director for emerging market equities

Vietnam, Argentina, Romania and Pakistan represent a collection of geographies, languages, histories and business cultures with one thing in common: they each offer major growth opportunities. The VARP economies are over 13 times smaller than the BRICs and therefore we do not expect them to help drive the global economy in the same way, or to generate the same levels of returns for investors. However, these markets can offer a deeper dimension to an emerging markets portfolio with potential attractive risk returns – because of their diversity.

US Bank Growth

Davide Marchesin, Fund Manager in GAM’s non-directional equity team, Lugano

We are seeing a major inflection point in the growth outlook for US banks. They are set to benefit from milder regulation, a widening of net interest margins as the yield curve steepens, and low provisions as the economy reacts to fiscal stimulus. Consequently, going long the market, particularly select regional names looks like attractive positioning. Another financial theme that is growing in prominence is the lower intervention of the US government in businesses such as student lending and mortgage insurance, where we see private players regaining market share following the contraction during the Obama administration.

European Defence Contractors

Gianmarco Mondani, CIO of GAM’s non-directional equity team, Lugano

We are starting to see some interesting prospects among European defence contractors. After several years of revenue declines, led by budget discipline, heightened geopolitical risks are likely to lead to better revenue prospects than the market currently estimates.

Convertible Bonds

Jonathan Stanford, Senior Fund Manager in GAM’s non-directional equity team, Lugano

Convertible bonds could prove very interesting in 2017. They allow investors to gain exposure to the equity market, while owning fixed income assets, which seems a good fit for an environment in which nobody wants bonds and the majority are nervous about equities. The short duration characteristic of convertibles prevents over-exposure to rising interest rates. As a spread asset, the credit component allows for greater yield opportunities or valuation upside in a relative value arbitrage scenario. The rise in interest rates would usually call for an increase in primary market activity in convertible bonds. The comparative competitiveness toward other assets will increase, prompting companies to choose convertible debt issuance over corporate bonds or bank loans. This will allow for more diversity, a renewed pool of assets and greater liquidity. The possibility of inflation, backed by stronger economic growth, would bode well for the equity market, and thus would allow convertible bonds to appreciate thanks to their strong equity exposure, and further credit tightening.

Spread Contraction

Tim Haywood, Investment Director for absolute return strategies

2017 will surely bring greater spread contraction between emerging market and developed market longer-bond yields: the former surged after the election of Donald Trump but growth prospects locally have dimmed. Conversely, developed market yields face multiple headwinds, including policy rate rises rather than cuts, less quantitative easing, more net issuance, inflation pulse in weak currency countries, fewer foreign purchases, credit rating declines and waning momentum.

North American Onshore Oil Services

Roberto Cominotto, Investment Director for energy equities

The oil & gas service and equipment industry has gone through its worst crisis over the past two and a half years, reaching the trough of this cycle in the third quarter of 2016. While for offshore-exposed companies it will still take several quarters until capacity utilisation improves, the North American onshore service industry is already picking up. US shale oil & gas producers are confident that the oil price recovery will continue in 2017 and have started to announce increased investments. Mid-cap companies specialising in servicing the oil & gas fracking industry are best placed to benefit in 2017.

The ‘Tutti Frutti’ Portfolio

Scilla Huang Sun, Portfolio Manager for luxury equities

The macro environment is currently quite volatile and will remain so in 2017, with several binary political events on the horizon. Investors should bring the benefits of ‘tutti frutti’ effect to their portfolios, being well diversified from a top-down perspective (we own growth companies, momentum stocks, defensive names and ‘fallen angels’). At the same time, one must keep a bottom-up focus on companies with strong brands and cash flow generation that can gain market share. We are confident that the positive trend seen in the third quarter of 2016 will gain further momentum, and are convinced of the secular growth potential of the luxury goods industry.

Equities Unaffected by Currency Moves

Reiko Mito, Portfolio Manager for Japanese equities

2017 is the time to buy Japanese companies that can grow regardless of exchange rates. The volatility of the Japanese yen is understandably a nightmare for the managers of domestic companies. Nevertheless, we are keen to invest in companies that can grow no matter how the currency moves. FX rates inevitably affect companies’ financial statements in the short term, which can be either a positive or a negative. We look beyond the short-term impact to underlying fundamentals. It is more important for us to analyse whether the impact is just the translation effect, or whether the company is eventually losing or gaining competitiveness.

The Comeback of Discretionary Macro Investing

Christian Gerlach, Portfolio Manager for commodities

Like the 1970s, market volatility will spike in many markets during the next few years. The forces of populism, inflation and currency devaluations will destroy the post-2008 investing consensus (staying long low-volatility assets). As a pandemic of fat-tail events will undermine many beloved investing approaches, returns will start to cluster around the most flexible approach possible – discretionary macro.

M&A in Healthcare

Christophe Eggman, Investment Director for healthcare equities

M&A will remain a prominent feature of the sector going into 2017, and we expect to see an acceleration of this trend in the coming quarters. For many companies M&A is a necessity – not just an option – in order to grow, and a way to offset a potential loss of pricing power. Deal drivers include large cash balances, repatriation of offshore cash back to the US, attractive acquisition targets, the quest for growth and lower tax rates. Another performance catalyst is Trump’s proposed corporate tax reform, including a repatriation bill for offshore assets, which will certainly accelerate capital deployment.



Nothing contained herein constitutes investment, legal, accounting or tax advice and should not be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. The statements and opinions are those of the author at the time of publication and may not reflect his/her views thereafter. Reference to a security is not a recommendation to buy or sell that security.  The companies included are not necessarily held by any portfolio. Past performance is not indicative of future performance. No liability shall be accepted for the accuracy and completeness of the information.




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