Quilter Cheviot's lead portfolio manager on the MPS team explains why this bull market has further to run.
'The last 12 months will be remembered fondly by investors for its combination of positive returns and low levels of volatility. For the first time since the financial crisis in 2008, the global economy enjoyed a period of synchronised growth and leading indicators suggest that this momentum should continue in 2018.
The improvement in economic conditions has driven company profits higher, which in turn has supported strong gains in equity markets, with many indices closing the year at, or very close to, their all-time high.
In December’s update, I referenced the constructive outlook for equities that we maintained throughout 2017. Pleasingly, the Quilter Cheviot Managed Portfolio Service (MPS) strategies all delivered a positive return for the year. Across the range, our higher risk MPS Global Growth strategy on platform delivered a gross total return of 12.4%, our MPS Balanced strategy returned 8.9%, while our lower risk MPS Conservative strategy finished the year up 5.9%. Returns were also firmly positive from our lower cost MPS index (IDX) strategies.
Our views have remained largely unchanged in the intervening period, with the strategies continuing to demonstrate a tactical bias towards equities. At a geographic level, Japan, North America and continental Europe remain our key overweight allocations, as we continue to see better opportunities from international stock markets than from the UK.
As highlighted in December, a number of new investment ideas were introduced to the strategies’ exposure to these regions over the course of the year.
Bond market predictions
Away from equities, bond markets face a number of challenges in 2018, including a backdrop of strong global growth and less accommodative major central bank policy. While these factors support a cautious stance on bonds, much will depend on inflation. As long as it remains reasonably low, then we would expect any adjustments in bond markets to be fairly smooth and limited.
Political risks are also likely to provide support to safe haven investments, and with valuations stretched in certain areas of credit markets, quality and liquidity continue as the prevailing themes within the strategies’ fixed interest exposure.
We also retain an allocation to a differentiated range of absolute return funds, as well as commercial property holdings; with each strategy’s exposure determined by its stated investment objective and risk profile. Alongside a modest cash weighting, we see these positions as a diversifying counterbalance to the portfolios’ equity allocations.
As one would expect, these exposures failed to keep up with the broad-based gains seen from stock markets in 2017, but nevertheless contributed to the strategies’ headline returns, with strong performance from a number of the holdings.
Nine years after the financial crisis, the economic cycle is maturing. Financial conditions will likely tighten over the coming year as central banks phase out quantitative easing and move to normalise interest rates. However, we believe the business cycle has further to run, and see few signs of traditional excess associated with an over-extended bull market.
The newly announced cuts in US tax rates should also help the world’s largest economy deliver another year of decent growth. With little sign of a pickup in inflation, very low credit spreads and equity valuations only slightly above long-term averages, we believe that equities can make further progress in 2018.'