2017 tips: buy China and Greece – but avoid gilts

We ask eight of our experts to give us their views on where to invest and what to avoid in the coming year.

Edward Chancellor

Financial historian

The global investment outlook remains dreadful. Valuations for US equities are close to bubble levels. Emerging market equities look much more attractive at first glance, especially emerging value, which my former colleagues at US wealth manager GMO expect to deliver more than 6% a year in the years to come. My concern, however, is that the ever-closer prospect of a credit bust in China will produce another disappointing year for emerging.

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Having said that, the folks at the African investment firm Imara have persuaded me that "quality" stocks in that region (mostly locally listed subsidiaries of Western multinationals) are a reasonably good bet. Imara's African Opportunities Fund yields over 4%. The local currencies have been beaten down. When the mighty dollar turns, quality African stocks should do well. These companies are used to regional crises, so should be able to weather storms arising elsewhere in the world.

Aside from China, the main risk I foresee is another eruption in the eurozone. The recent Italian referendum result makes this somewhat more likely. If Europe blows up yet again, Brexit will look like a sideshow. Having had a bad year, sterling could even end up looking like a safe haven. Finally, deflationary pressures are still out there, so long-dated US treasuries may surprise on the upside.

Rupert Foster

Asia investment strategist

The sanguine reaction of markets to Italian prime minister Matteo Renzi's resignation, after his loss in the Italian referendum, just reminds one that markets hate surprises (Brexit, Trump) but love predictable events. Everyone expected the referendum to fail (the polls were right for once), so no new selling appeared. However, this should not blind investors to the ramifications. Populist anti-euro political parties continue their rise in Europe as median incomes across much of the continent head into their second decade of stagnation.

The European Central Bank continues to buy time for European politicians to make the needed structural change and those politicians continue to disappoint. A new Italian government may now struggle on until May 2018, but stockmarkets will vote with their feet on the Italian banks, forcing some reaction. Unless the Italians can convince the Germans to allow them to recapitalise their banking sector, there will be a banking crisis.

In the meantime any politician seen to be bailing out banks will be severely punished by voters. To make matters worse, any Italian politician who forces private individuals who hold Italian bank bonds to bear the pain of a recapitalisation will also reap the voter whirlwind. As a result, a southern European banking crisis is highly predictable in 2017.

However, what is currently not discounted in share prices is southern Europe pulling the northern European banks into the crisis. This sadly is also inevitable. Italy has $5trn of debt and much is held by northern Europeans. European politicians can do little to square the policy circle when caught in the vice between insolvent banks and insurgent electorates. The game is up.

That said, early in 2017 there may appear to be two unlikely but brave knights riding to the rescue of world markets US president-elect Donald Trump and China's president Xi Jinping. Trump has promised vast tax cuts which will provide a strong and quick boost to US consumption.

Xi will start to outline an acceleration of reform, one that is likely to lead to China quickening its transition to a consumer society and thus underpinning global growth over the next decade. Sadly Trump's tax cuts will prove a transitory boost to markets as consumers will start to fret over the outlook as Europe tailspins. Xi's reforms will deliver lasting change, but too little too late for global growth.

Where does that leave us on investments? I'd sell or even short any northern European banks in the next couple of months, particularly those that have rallied most since Brexit. I'd ride those down to the bottom of the crisis, then buy China, and the VIP (Vietnam, India, the Philippines) markets aggressively as they will pull out of the crisis quickly (as they did in 2008), due to their wonderful underlying growth metrics focused around demographics, competitive wages, productivity gains and strong internal consumption growth.

Dominic Frisby

Investment author and Money Morning contributor

My bet is that we're going to see a stronger pound in 2017. Negative sentiment towards sterling is now firmly entrenched when I make the case that the pound will get stronger, most people seem to think I'm bonkers, which is a good sign. I spoke to a group of accomplished chief financial officers the other night on this very subject, and it was clear that most of them thought I was off my rocker. It tells me there are a lot of bears still to turn bull, shorts to turn long, and sellers to turn buyer.

The pound looks undervalued by a good 15% against both the euro and the dollar. You just need to look at what a pound buys you overseas compared with what it gets you here. On top of that, this seems to be a recurring theme every eight years, we get these sterling collapses, when the pound sells off by 30%-40%. We saw it in 1976, when the lights went off. And in 1984, during the miners' strike. And in 1992, when George Soros went short. Then in 2000, during dotcom. We saw it after the financial crisis of 2008 and today, following Brexit. Every time it's recovered. This time will be no different.

If you follow my Money Mornings (MoneyWeek's free daily email sign up at our website at MoneyWeek.com), I've modestly dubbed this eight-year cycle "the Frisby Flux". Frisby is now long sterling and he's using a stop-loss in case he's wrong. Set your timer for seven to eight years from now. That's when we'll get the next big sterling sale.

Paul Hodges

Chairman, International eChem

Four thoughts occur to me as we look forward to 2017. Firstly, that political and social risk is returning to levels last seen in the 1970s, and 1930s. Secondly, one needs to keep a cool head when thinking about one's portfolio. It is too easy to become emotionally involved in debates over Brexit, Trump's presidency, the euro's future and the many other areas where passions are beginning to rise. Thirdly, it is critical to future-proof your investments against risks which might seem small today, but which would have enormous impact if they occurred. Interest rates are a good example.

The benchmark ten-year rate has already trebled since the summer to 1.5%. How would your investments look if it trebled again to 4.5%? Fourthly, recent developments confirm that we have gone through the "Great Unwinding" of stimulus policies that I outlined two years ago on these pages in January 2015. We now face the "Great Reckoning" for the mistakes that have been made.

As I warned then, economic growth becomes an oxymoron with an ageing population. Political and social risk are rising, and people are becoming angry. The best strategy to adopt for 2017 is therefore likely to be to "expect the unexpected".

In short, we expect markets to provide investors with a very bumpy ride next year, with the US dollar probably being a strong performer amongst currencies due to its role as a relatively safe haven. Cash could also be a good home for those operating in sterling.

We do not share current concerns over the potential for sustained inflation, given the fact that disposable household income is still below the pre-financial crisis peak in 2007. We see the key asset class to avoid as being bonds, particularly gilts, given that foreign investors currently own 27% of that market. Any reduction in the commitment of these investors would create major risks for the market, which in turn, of course, would affect the stockmarket itself.

Paul Hodges publishes The pH Report, providing investors and companies with insight on the impact of demographic changes on the economy.

Charlie Morris

Head of Multi Asset, Newscape Capital & Editor, Fleet Street Letter

Here's a contrarian trade for 2017 buy Greece. The Greek economy is showing signs of life. Industrial production is rising, unemployment is falling and the days of deflation are nearly over. Growth and retail sales have rebounded, the current account is in surplus and the banks have been recapitalised. It's not a star performer by any means I'd give the Greek economy a Grade C. But the market perception is currently an F.

However, that's changing. The Greek stockmarket is looking perky. The 200-day moving average is rising, while 70% of stocks are trading above trend. Volume is improving and according to Bloomberg, earnings are set to grow by 30% next year, which would take the market price/earnings (p/e) ratio to around 12. The market trades at 0.5 times book value (about half the value of its assets, in other words) and at 0.6 times sales. That makes it a deep value situation at a time when the situation may well change for the better.

Discussions over debt relief are under way and a positive outcome would be well received by the market. The simplest way to access Greece is via the Lyxor Greek ETF (Paris: GRE), which trades on the Paris exchange in euros. It tracks the FTSE/Athens Large cap index, which comprises 20 stocks. This trade isn't for the faint-hearted, but it has value and momentum on its side while most people have written it off. They say bull markets climb a wall of worry. There is no shortage of that here.

Tim Price

Manager of the VT Price Value Portfolio and author of "Investing through the looking glass: a rational guide to irrational financial markets".

There is one market that stands out this year for two different but entirely compelling reasons Japan. One of them is valuation. Fully 40% of the entire Japanese stockmarket trades below book value. Try finding another developed market as inexpensive. The other is a flow argument. John Seagrim of CLSA points out that there is now a new "High Rollers" club in Japan, and to become a member you need to commit to buying at least 4trn worth of stocks.

The Bank of Japan qualifies, and will have bought 6trn worth of Japanese equity exchange-traded funds (ETFs) this year. Corporate Japan is on track to buy back 6trn worth of stock in 2016. Nisa (a tax wrapper equivalent to the UK's individual savings account) investors are on track to buy an annualised 4trn in Japanese equities. And the Government Pension Investment Fund, the largest pension fund in the world, is expected to buy 5trn worth of stocks to meet its target equity weighting this year. Japan is outstandingly good value, but now also enjoys solid domestic support for the first time in years. Buy now to avoid disappointment.

Peter Warburton

Director, Economic Perspectives

The second half of the 1990s were characterised by the dotcom bubble, a boom fed by cheap money, easy capital, market overconfidence and animal spirits. Stock valuations were based on mythical or distant income streams and investors all too willing to overlook traditional metrics. The acronym TMT (Technology, Media, Telecom) was coined to evoke the explosive potential of trinitrotoluene (TNT). By the end of 2001, a majority of publicly traded dotcom companies had folded, and trillions of dollars of investment capital had evaporated. Scroll forwardto 2016 and it is happening again.

Credit conditions are tightening and the supply of easy capital to these sectors is liable to evaporate. Technology, especially software and computer services, media and telecom stocks are ripe for another de-rating in 2017 as business models and pricing structures bite the dust. The prime candidate for underperformance is media stocks. Viewing figures for scheduled programmes are in terminal decline. Consumers have learned to zone out when advertisements appear and the value of clicks is in a bear market. Avoid.

John Stepek

Executive editor, MoneyWeek

I've outlined our big thematic ideas on the preceding pages. But sometimes we all like to get away from the "big picture" stuff, and just look for a promising swift punt and I think I've come up with a decent option for your consideration.

The coal industry has had a terrible time over the last few years particularly in the US and 2015 and early 2016 saw it hit its nadir. The crashing natural gas price, tighter regulations in the US, and overproduction in China all hammered coal prices and saw giants such as Peabody Energy forced into the bankruptcy courts.

However, as is often the case, just as everyone thought it was "game over" for coal and we'd soon all be relying on nothing but solar panels and wind for our energy needs, coal made a comeback. China cut back too hard on domestic supply, driving up prices, and now Donald Trump's victory means that the industry may catch a break from US regulators. As a result, the surviving coal companies have seen their share prices shoot up this year, and the bull market isn't over yet.

US financial paper Barron's suggests Arch Coal (NYSE: ARCH), which got out of bankruptcy protection in October, as a promising play on the sector, and I'd second that. Arch has been through the wars, but now costs have been slashed, and the company has "high-quality operating assets" and a "conservative balance sheet" to go with them, to quote one analyst. I'd emphasise this is not a buy and hold stock, it's a relatively short-term trade.

In the long run, coal is most likely on its way out as an energy source, and even if not, it's an extremely cyclical business, so I wouldn't be keen to hold this stock for more than a year. But I suspect that before the end of 2017, a canny investor should be able to see a double-digit return off this trade. Just don't stake the mortgage money on it.