Bank of England to raise interest rates in 2017

After the EU referendum the Governor of the Bank of England, Mark Carney, dropped interest rates and increased liquidity measures. Though this seemed prudent and necessary at the time, 2016 has seen strong employment and decent economic figures with continued inflationary pressures. Next year the Bank may look to increase rates after this bout of quantitative easing.

The risk of a corporate bond sell-off

Despite the recent sell-off bond yields still appear too low. The 10-year Gilt (UK Government bonds) yields about 1.5%, but inflation is expected to be around 2.5% within a year. If inflation expectations prove correct then bond yields could easily spike higher.

After the financial crisis in 2007 cautious investors poured money into corporate bonds. Returns have been handsome as capital values have improved and income has proved reliable. However we are concerned about the lack of liquidity in the corporate bond market. This lack of liquidity will make it difficult to sell in poor market conditions. In the face of this, some corporate bond fund managers have arranged additional financing arrangements to allow them to meet redemptions.

Impact investing goes mainstream

We see increasing numbers of people who want their investments to have a positive effect on society and the environment, while still earning a financial return. Until recently the investment options were quite limited. From our conversations with asset management companies both in the UK & Europe, we expect to see new impact funds launched in 2017, for fixed income and equity asset classes. Given the positive feedback from potential investors we wouldn’t be surprised to see strong inflows over the next twelve months and beyond.

Continued pressure on fund management charges

Active fund managers are under pressure to justify their fees. Initial findings by the Financial Conduct Authority (FCA) show that most active fund managers charge more but do not add any value compared to cheaper, passive funds. The FCA may well flex its regulatory muscle when their final report is published next year.

Evidence shows that investors are already more cost-conscious. Since 2007 assets managed in passive funds have grown 4x faster than active products and now stand at $6tn globally. Here at EQ we’ve seen a surge of interest in our Low Cost portfolios.

We expect to see the cost of investing in alternative assets fall, and a departure from the ‘2 & 20’ formula that has become the standard (fees of 2% plus 20% of any outperformance).

After the year that was 2016

Despite the political upheaval of 2016 markets seem to have taken events in their stride. Few investors have ended up disappointed by their portfolios’ performance. As we look ahead to 2017, plenty of uncertainty awaits. Will markets continue to ride out the storm? Only time will tell. Our overall positioning continues to be defensive. While we cannot predict the outcome of elections, we continue to find what we view as solid investment opportunities.