Pension schemes will need to navigate around a number of headwinds in 2016 as investors adjust to a divergence in monetary policy, slowing global growth and steep equity market valuations, Kames Capital has said.
Patrick Schotanus, an investment strategist at the group, has identified a number of potential risks which could impact returns next year as markets recalibrate to cope with the Federal Reserve’s decision to raise interest rates this month.
As well as this major change in direction, other challenges also remain, with the risk of a Brexit, and continued volatility across fixed income assets if rates – and inflation – rise faster than expected.
Below Schotanus highlights four investment headwinds which schemes need to be aware of as they seek to maximise returns next year.
Schotanus expects the debate about Britain’s membership of the EU to come to a head in 2016, amid a shift among the electorate towards an exit vote in the wake of the migrant crisis this year.
Combined with the UK’s twin deficit – the current account and budget deficits now account for more than 10% of GDP – Schotanus said sterling could weaken sharply against other currencies.
“We think sterling will face a headwind in 2016 given we face an increasingly likely referendum on Brexit, and with the UK’s double deficit also impacting sentiment,” he said.
“A rate hike is also unlikely until much later in the year, so sterling’s recent spell of weakness could well continue.”
US housebuilders have benefited from the return of house price growth in the US following one of the sharpest downturns on record.
However, having outpaced the wider stock market over the last few years, they started to correct in late 2015. One way to assess how much further this trend has to run is to look at housebuilders versus lumber, one of the core raw materials needed in house construction.
“If you do a ratio of housebuilders to lumber, the stocks have come back some way from the peak seen earlier in the year,” he said.
“Housebuilders got too expensive, and now as the Federal Reserve starts to hike rates, it will put renewed strains on the sector. Therefore, housebuilders should see share prices mean revert back to their historical trend versus lumber, and so going underweight (or indeed short) the sector looks attractive.”
Airlines such as easyJet have benefitted from the capitulation in oil prices over the last two years which provided a direct boost to their revenues.
However, with share prices vastly outpacing moves made by equity markets in general (easyJet, for example, is up 262% in five years, versus a gain of 4.14% for the FTSE 100) and oil prices unlikely to fall by anything like the amounts already seen over the past two years, Schotanus said valuations looked stretched.
“Airlines globally have benefited from the collapse in energy prices, but that is done now, and it is definitely an industry to be underweight, or even short,” he said.
The ultimate store of value has endured a torrid 2015, falling almost 20% from its peak of $1,300 earlier this year to just $1,056 per troy ounce currently.
Schotanus said the strength of the US dollar had been one of the main causes of the precious metal’s decline, and while it may stabilise in 2016, he warned schemes it was unlikely to recover next year.
“It is quite possible we have seen the biggest part of the upward move for the US dollar, so that may help gold, but in reality the best we can hope for is that the price stabilises around the $1,000 mark,” Schotanus said.
“We would need an extreme event in order to provide a real boost to gold, and given the current economic outlook globally is fairly benign, it is hard to make a case to invest at these levels when there is likely to be further pressure on the asset.”
This just landed in my in-tray and I pass it on without comment, other than to say, yet again, that it is virtually impossible to be a satirist in modern Britain...
Avalon, the provider of pre-paid funeral plans, has teamed up with Championship side Huddersfield Town to create the UK’s first football club branded funeral plan.
The pre-paid Terriers Funeral Plan from Avalon means the club’s supporters can make their funeral a celebration of their life as a Huddersfield Town fan.
Costing £4,195, fans will receive from the plan:
a coffin in Huddersfield Town colours and Club Crest or traditional quality veneered coffin with home shirt and name printed on the back;
a blue and white floral football bouquet with condolence card from Huddersfield Town;
the club song, Smile Awhile, played at the funeral service;
free hire of the Radcliffe Suite function room at the PPG Canalside sports complex for the wake (catering not included);
ashes scattered around the pitch at the club’s John Smith’s Stadium;
announcement at a Huddersfield Town home game and mention in the match day programme;
funeral director services required to conduct the funeral.
Speaking of the new initiative, Sean Jarvis, commercial director at Huddersfield Town, said: 'While many funerals remain quite traditional, some are increasingly becoming a celebration of life, and that includes sporting interests, and we are often asked if people can use our branding in one form or another. It's still a bit of a taboo subject but there's no reason why that should be. The only certain things in life are death and taxes and the sooner we start planning the better. Our commercial deal means the club receives a benefit from plans sold so even when Town fans pass on they can leave a small legacy to the club.’
Paul Wilson, head of business development at Avalon, said: ‘It’s not uncommon for a person’s love of their football club to feature at their funeral, and many clubs are happy to scatter a supporter’s ashes on or close to their pitch. With the Terriers Funeral Plan, however, we’ve created the UK’s first fully themed funeral service celebrating the life of a fan. With this innovative new plan, we’re giving people the opportunity to combine the love of their team with the benefits of a pre-paid funeral.’
To launch the Terriers Funeral Plan, Avalon and Huddersfield Town have released a YouTube video featuring Bill Shankly’s famous quote, ‘Football isn’t a matter of life and death – it’s more important than that.’
Avalon protects customers from rising funeral costs and their loved ones from the worry of arranging a funeral when the time comes. Avalon funeral plans are also available in Spain, Portugal, Tenerife, Cyprus, Malta and Turkey.
For further information or to receive the full Terriers Funeral Plan brochure, visit www.terriersfuneralplan.co.uk or call Avalon on 0330 333 6318.
The Basel Committee on Banking Supervision has issued a consultative document called 'Identification and measurement of step-in risk'.
Step-in risk refers to the risk that a bank will provide financial support to an entity beyond, or in the absence of, its contractual obligations, should the entity experience financial stress (which sounds an awful lot like the contingent liabilities arising from guarantees and indemnities that featured on bank balance sheets when I was a wannabe international banker in late 1979).
The proposals would form the basis of an approach for identifying, assessing and addressing step-in risk potentially embedded in banks’ relationships with shadow banking entities (although without limiting the proposals to specific entities).
The Committee welcomes comments from the public by March 17.
European buy-side traders and portfolio managers believe MiFID II provisions could increase trade execution costs in cash equity trading and reduce market liquidity - particularly in small cap stocks - according to a new report from Greenwich Associates, European Equity Trading and the Consequences of Regulation.
MUFG Investor Services, the global asset servicing arm of Mitsubishi UFJ Financial Group, says it has now gained all regulatory approvals for its acquisition of UBS Asset Management’s Alternative Fund Services (AFS) business and the acquisition has closed.
A revision in Japan’s gross domestic product (GDP) data last week tallies with Coutts' own positive ‘top down’ view on Japanese equities, highlighted in its Investment Outlook 2016, which was released last week, says Alan Higgins, chief investment officer, Coutts UK.