2016 was marked by market volatility, political uncertainty, and the rise of populist movements across the globe. With more of the same expected in the new year, investors must tread carefully to navigate the current market.
In a report on the outlook for the new year, State Street Global Advisors’ ETF arm, SPDR, has suggested three strategies for investors to prepare for the ‘new abnormal’ environment we are likely to experience in 2017.
1. Seek income at a reasonable risk
The ETF provider addressed income first, warning that fixed income investors must tread carefully in the current late-cycle environment, with rising interest rates and credit rating downgrades at a level not seen since 2009.
With this in mind, SPDR suggests splitting fixed income portfolios into three distinct buckets, aimed at delivering diversification, stability and income, with the core of the portfolio providing all three of these characteristics.
Outside the core portfolios, the firm advocates allocating to floating rate over fixed-rate bonds, as well as suggesting investors augment their credit allocations with senior loans. Though the firm said credit remains attractive for income generation, it believes loans will benefit more in an era of rising rates and high defaults than fixed-rate high yield.
SPDR also notes it is important to look at the way investors generate income from equities, suggesting they should look at dividend-paying solutions. However, the firm warned investors should focus on “quality” rather than “quantity” of yield by focusing on dividend growers rather than the highest-yielding stocks in the market.
2. Position for a reflationary environment
As inflation begins to edge up around the world, and further boosts expected as Donald Trump takes the Presidential seat at the White House later this month, investors would do well to consider playing this in their portfolios as well as mitigating the impact on their savings and investments from inflationary pressures, says SPDR.
One way they can do this is by investing in natural resources stocks, such as industrial metals, agriculture and energy, which have moved on a similar trajectory to inflation expectations.
The firm has also suggested there are three additional trends that could emerge as President-Elect Trump takes over the leadership of the US: rising interest rates and reduced regulation; increased infrastructure and defense spending; and rising oil prices, which investors should keep in mind.
3. Look to mitigate headwinds from episodic volatility
As the economic and political backdrop across the world remains uncertain, investors continue looking for ways to hedge risks within their portfolios.
Many investors rushed into low volatility strategies in 2016, but these underperformed as stock markets reached new highs. Therefore, SPDR suggests investors should look beyond single-factor low volatility strategies and consider equity allocations that minimise volatility within a portfolio, while providing a more balanced exposure.