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Cuffelinks Newsletter Edition 238

  •   2 February 2018
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Investors face a dilemma in 2018. Markets always offer uncertainty, but we have the best global economic conditions since the GFC at a time when most asset classes appear fully priced.  

It's traditional to start a new year with forecasts for the next 12 months, but let's kick off with a Warren Buffett warning:  

"It's a terrible mistake to look at what's going on in the economy today and then decide whether to buy or sell stocks based on it. You should decide whether to buy or sell stocks based on the long-term value you're getting for your money at any given time. And next week doesn't make any difference because next week is going to be a week further away. The important thing is to have the right long-term outlook, evaluate the businesses you are buying. And then a terrible market or a terrible economy is your friend. If you wait until you see the robin, spring will be over."

John Mauldin, whose newsletter goes to over one million subscribers, said recently:

"Two years ago, when I was at the same Bank of America Merrill Lynch investment conference that I attended last week in Hong Kong, the mood in the room was quite sombre, even bearish. The sentiment turned out to be wrong ... the mood of this year's conference was almost universally upbeat. There was a clear consensus among these very seasoned and powerful traders." 

Amid this confidence, The Economist leads this week with a story on 'The growing threat of great-power conflict', mentioning the US, North Korea, China, the UK and Russia. It's not a time to ignore the risk of black swan events. 

What about rising rates? Investors with little in fixed interest might wonder why they should worry. Consider an infrastructure stock like Sydney Airport. Its stable earnings mean it's often valued as a bond substitute, and its $8 billion in net debt make it exposed to rising rates. It has hedged the risk for many years but free cash flow and therefore dividends would be hit by future rising rates. 

What should an investor expect from their portfolio in 2018? For those beating themselves up for not backing the big winners last year, the Future Fund and Willis Towers Watson 2017 Asset Owner Study of large asset managers suggested achieving CPI plus 4% will be a stretch over the next five years.

 


We start our articles with the latest thoughts from Howard Marks and his cautious optimism, while Miles Staude gives an upbeat assessment on Australia's wealth and prosperity. Gopi Karunakaran is more circumspect, and warns about the assumption that government bonds are defensive and diversifying. Still on managing risk in 2018, Andy Sowerby offers strategies for the inevitable return of higher volatility.

Last year, both Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) attracted record inflows as more investors embraced them. Ilan Israelstamsummarises 2017 and makes some 2018 predictions for ETFs, while Nathan Umapathy looks at what caused the strong year for LICs.

It's tempting to ignore the Bitcoin babble (sic) but judging by the Christmas party discussions, it's almost mainstream now. Carlos Gil reminds us that price and value are not the same thing, regardless of the future potential of cryptocurrencies.

This week's Sponsor White paper from AMP Capital's Shane Oliver is a thought-proving set of lists on what to look for in 2018.

Best wishes to all our readers for a successful 2018. It should be quite a ride. 

Graham Hand, Managing Editor

 

Edition 238 | 2 Feb 2018 | Editorial | Newsletter

 


 

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