Morningstar IM sees ‘scope for increased investor caution’ as 2017 gets under way the company said. It also noted however that despite ‘broad valuation headwinds’ valuation opportunities remain, with the firm having a medium to high conviction in emerging markets, European financials and sterling.
“While questions persist as to whether Donald Trump’s election is a game changer in terms of US economic growth, the availability of this news is tempting investors to speculate on the cyclical or structural nature of reflation,” Kemp said. “This, in turn, risks sending them on a path of short-termism and sector rotation. However, investing is always a long-term endeavour and so this temptation must be resisted. “
“If 2016 contained just one lesson, it is to avoid being whipsawed by changes in short-term sentiment,” he continued. “Investors are likely to face similar challenges in 2017 and therefore must do their best to shut out the siren song of forecasters. “Looking ahead through a valuation lens, there are many more hurdles to jump. Bond yields are still largely negative in Germany and Japan and eurozone sustainability is far from secure. Most critically, valuation pressures continue to mount in many key markets. This should create a growing sense of caution among prudent investors, especially those relying on fixed income investments to protect them against a decline in equity prices.”
Kemp also warned that the strong returns in many markets last year appear unsustainable in a long-term context, as asset prices are subject to the gravity of fundamental valuation. As prices become dislocated from fair value, the Morningstar managed portfolios will inevitably become more focused on the preservation of capital, he explained.
