In early 2017 the global market outlook appeared broadly promising. After a brief spate of panic selling upon the ascension of Donald Trump to the US presidency, the country's equity market had surged.
Investors were also looking elsewhere for returns, amid the ongoing low interest rate environment that had left so many swathes of global bonds offering minimal yields. But opinions were mixed over where held the most opportunity. So we asked a set of market experts their views the following question and summarised the most popular opinions.
What will be the best performing mainstream and alternative asset classes, on a risk-adjusted basis?
Answer: High-yield bonds, event-driven hedge funds, Asia-Pacific real estate
It looked like a difficult year to predict back in early 2017. The election of Trump to the US presidency combined with a set of potentially disruptive European elections left the political landscape filled with potential pitfalls. Added to that were uncertainties over whether the US's improving economy would cause the Federal Reserve to pull back on its supportive monetary measures at a faster rate than thought.
As we noted in our Year of the Rooster predictions, "the key drivers will be less monetary accommodation, more fiscal push and more policy ruptures to support an inflection in rates and inflation. More typical asset relationships and rising volatility might be in store, especially in the US."
Amid these relatively uncertain times the experts we spoke to favoured three main asset classes. They pointed to high-yield bonds because of the strong returns they could provide at a time when overall bond yields remained low, but improving economic conditions were raising the likelihood of interest rate hikes in the US.
We also pointed to event-driven hedge funds for their flexibility to adapt in the event of market surprises. While hedge funds had not been in favour for years due to their mediocre returns and high fees, one thing they are meant to excel at is adapting quickly to uncertain market times. It made them a decent diversification play in potentially volatile markets.
Last, we chose the old Asian investor favourite: bricks and mortar. The region's major cities in particular looked like good bets at a time when regional economic growth remained decent, led by the economies of China and India. And for institutional investors seeking diversification of returns, putting more money into property looked a good bet.
Looking back a year later, these predictions proved to be somewhat mixed. High-yield debt did indeed enjoy a strong year as investors needing fixed income but wanting a bit of juice looked across the credit rating spectrum. The S&P US High Yield Corporate Bond index returned 7.2% during 2017
Hedge funds also enjoyed better times. As a whole the industry posted positive returns every month during 2017, the first time it had done so since 2003. The HFRI Fund Weighted Composite Index ended up offering an 8.5% return, which looked really quite good — until managemnt fees of 1.5% to 2% and profit margins of 15% to 20% were considered.
Still, it was a good year for hedge funds and event-driven funds did help to lead this level of return, amid a spate of mergers during the year in the healthcare, technology, media, and telecoms industries, according to HedgeFund Research
. The total return of such funds was 7.3% for the year. Not a bad diversification bet.
Asian real estate shares also enjoyed a good year. The MSCI AC Asia Pacific Real Estate Index
, which is based upon the listed stocks of property companies in the region, posted a 28.96% return for the year; a very healthy level of return by any measure. Meanwhile the IPD Global Quarterly Property Fund Index reported an annualised total return of 11.1%
as of the third quarter of 2017 (figures for the fourth quarter had not been published as AsianInvestor went to press).
But while our asset class choices did well last year, that didn't mean they were the pick of the crop. That was Asia's equity markets.
The MSCI Asia Pacific index, for example, posted a 32.04% return, as investors around the world piled money into emerging markets to take advantage of years of undervaluation and hopes the markets would see rapid rises from relatively low price-to-earnings ratios. It was a wise bet.