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#Market Strategy — 08.01.2018

Our Solutions for Investing in 2018

Florent Bronès & the team of Chief Investment Advisors

Solid economic growth, timid inflation, less monetary support and the growing influence of new societal issues underpin the investment themes selected for 2018 by BNP Paribas Wealth Management's strategists in the United States, Europe and Asia.

In 2017, the global economy continued to improve. Central bank support became less necessary and financial markets pursued a bullish trend.

In the year ahead, BNP Paribas Wealth Management expects a sustained economic recovery with rising inflation. Investors can expect to see less support from central banks. The environment should remain favourable for risky assets.

2017 was a fruitful year. Improving fundamentals around the world prevailed over geopolitical obstacles. Our ten investment themes for 2018, combined with our global strategy, should be an additional asset, indicating attractive investment solutions in this changing world.”

Florent Bronès

Chief Investment Officer at BNP Paribas Wealth Management

The themes below aim to guide investors towards attractive opportunities.

LATE-CYCLE THEMES

Seeking alternatives to traditional fixed income strategies

Investment opportunities in the bond universe are increasingly rare. Risk premiums, already weak last year, are shrinking further due to cash injected by central banks. Investors have been forced to take on more risk to obtain decent yields. BNP Paribas Wealth Management explores several ways of finding value in the bond universe and alternative funds with similar volatility levels.

 

The time is ripe for an acceleration in external growth (M&A and special situations)

External growth operations tend to multiply in the late stages of an economic cycle, replacing organic growth strategies with those that boost competitiveness. In the US, the implementation of new tax measures (tax cuts and tax breaks for repatriating overseas earnings) should bolster M&A activity and share buybacks. As Europe is lagging in the cycle, its potential for external growth and share buybacks is at least as good as in the US.

 

The importance of finding flexible solutions

The bond universe offers very few opportunities. Indeed, interest rates and bond yields are set to rise moderately despite a small rise expected in the coming months. This suggests that returns on traditional bonds will be very low.  Moreover, some equity markets are already fairly dear and some investors do not tolerate the level of underlying risk on these markets. Alternative strategies, unconstrained funds and certain structured products offer attractive solutions.

 

Value investing should finally have its day in the sun

A window of opportunity for outperformance is opening up for value stocks (i.e. undervalued stocks).Value stocks will capitalise on synchronised global economic growth and mounting inflationary pressure. These pro-cyclical trends will drive up bond yields to which value stocks are positively correlated. The discount on value stocks should diminish over the next few quarters.

 

Protecting against inflation risk via tangible assets

Inflation expectations are very low. And yet there is a real risk of surprise to the upside at this stage, especially in the US. A direct exposure to real assets helps to stabilise long-term returns and increase the portfolio’s protection against inflation.  Real assets include precious metals (e.g. gold), direct real estate, farms, vineyards and forests.

 

MEGATRENDS THEMES

Millennials: adapting to the largest generation so far

“Millennials” or “Generation Y” are the cohort of people born between 1980 and 2000, who are constantly connected via all kinds of numerous and varied devices. These young consumers, with new habits and needs, are revolutionising the way goods and services are consumed. They are forcing companies to innovate and are thus creating winners and losers in various sectors. We see opportunities in sectors such as Virtual Reality and Augmented Reality Database Management, including Cloud Computing, Big Data, and industries linked to new modes of consumption.

 

(R)evolution in mobility: the impact of electricity

In a bid to curb global warming, fight pollution and solve transport problems in congested cities, political authorities in the West and in China are taking measures which will accelerate the growth of electric vehicles. This (r)evolution is opening up opportunities at every level of the value chain: materials (metals, chemical products used in batteries), electricity producers, electric vehicle makers, and carpooling services, etc.

 

Infrastructure and urbanisation, a global trend

Infrastructure is the backbone of the economy. It comprises the basic framework, facilities, networks (transport, power, communications) and buildings which a country, organisation or community needs to function competitively and to improve the standard of living of its people. There are enormous renovation needs in developed countries. However, in emerging markets, infrastructure and urbanisation are essential for reaching the next stage in their expansion.

 

Sustainable production methods and healthy consumption habits increase their appeal

Enjoying a healthier lifestyle in a cleaner environment is becoming an important goal for an increasing number of people. Logically, consumer habits are changing too.  We take more care of our health and our attitude towards the planet is also evolving. Fixing sustainable targets has become a top priority. This theme seeks to capture these trends, and fits perfectly with responsible investments.

 

Business investment on the rise: cyclical and secular drivers

Companies will continue to invest in 2018, thanks to the buoyant economic cycle but also because of the necessity to invest in innovative technologies to ensure their long-term productivity. This theme identifies stocks which will benefit from this trend.
 


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