Market Views: The assets to avoid in 2018

This week, AsianInvestor is introducing the first in what will become a regular online column, called Market Views.

The purpose of this column is to gain the opinions of a few industry experts about a topical issue that is on the minds of institutional and wealth investors in the region.

In recognition of the number of outlook articles still coming out, we decided to tackle performance from a slightly different standpoint with our first column, by asking three experts the following question:

What will be the worst performing asset class in 2018?

Please find their responses below. 

Florian Ielpo, head of macroeconomic research 
Unigestion

We expect global government bond markets to deliver poor performance this year, as they now have two enemies. One being the return to normal inflation as an “inflation premium” is embedded in government bond rates and the other being the “growth premium” that reached new lows in 2017.

We believe the continuation of the current synchronised growth period should be the trigger for this real rate repricing.

We expect to see a correction at the short end of the curve, as expectations of normalised monetary policy start to emerge. Additionally, we expect the combination of higher inflation, synchronised global growth and central bank action to drive long-term bond yields higher.

The Barclays Global Treasury Index could well post negative returns in 2018 for the first time since 1994. Our calculations indicate that a rise of 50 basis points in US 10-year sovereign bond yields over the next 12 months could be enough to cancel out any positive returns generated by carry and roll-down.

This implies that bonds could act  as a poorer diversifier this year, so we must look to alternative solutions. We expect commodities and alternative risk premia to act as bond replacements in the case of an unexpected market shock.

Robert Horrocks, chief investment officer
Matthews Asia

Cryptocurrencies will be the worst performing asset class—or at least they should be. Speculators have swarmed to this asset class, having confused the utility of these currencies for evading government scrutiny with any idea of fundamental long-term value.

Even bitcoin’s own conference refused to accept bitcoin as a payment because it was too congested and transaction costs were too high.

Cryptocurrencies that were launched as a joke achieved multibillion dollar market values. And now governments, such as the South Korean government, have openly signaled their attention to crack down on bitcoin mining.

These markets are driven by pure speculation and momentum. A lot of the trading appears to have come from Asia.

It’s ironic, because Asia’s stock markets, whilst they may seem much less exciting on a short-term view, are currently in quite a good place. 

The economic conditions are in their favour both in terms of global growth and local monetary policy. Outside of a few high-growth stocks which have attracted the attention of momentum speculators, valuations are more reasonable for sustainably-growing established businesses.

In a global context, valuations seem more attractive still and US and European investors seem to be turning their attention to Asia again.

John Vail, chief global strategist
Nikko Asset Management

In 2018, the worst performing asset class will be UK 10-year government bonds, in our view.

While we expect losses in dollar terms for all major countries’ 10-year bonds during the year, a combination of a weak British sterling and sharply rising 10-year bond yield puts the dollar based return at -10% from 11 December 2017 (the date of our last forecasting meeting) through end-2018. 

Specifically, we expect its yield to rise from 1.2% in late 2017 to 1.95% at end-2018 and for the sterling to decline to 1.30 vs the dollar then.

Negative bond returns in all countries are driven by global economic reflation, tightening central banks and increased net bond supplies. 

The UK, however, will also be affected by increased fears related to Brexit and how to fund its very large current account surplus.

Worrying in this regard, inward property investment related flows have slowed and there is a major chance that foreign businesses will not increase investments in the UK until Brexit is clearer.

The Bank of England is becoming less dovish and is concerned about funding this current account deficit, so interest rates should not remain too low. Clearly, 2018 should be a pivotal year for fixed income globally, especially for the UK.