The investments set to beat the rest this year
Published 03/01/2016 | 02:30
The New Year is shaping up to be a volatile one for world stock markets.
Higher interest rates in the United States, China's economic woes, ongoing record low oil prices, and the possibility of Britain leaving the EU are all weighing heavily on investors' minds.
"The major implication of the recent US Fed hike is that investors should factor in lower returns in 2016 and prepare themselves for a more volatile trading environment," said Brian O'Reilly, head of global investment strategy with Davy.
Indeed, the decisions made on interest rates by the Fed, the European Central Bank, the People's Bank of China and other central banks will be a big factor for investors this year, according to Andrew Milligan, head of global strategy with Standard Life Investments (SLI). "It's unusual to get such a divergence in interest rates between the main central banks," said Mr Milligan. "There will be stress in financial markets as the Fed moves one way with interest rates - and emerging markets move the other."
"Investors are also worried about the slowdown in the Chinese economy - and how authorities handle it," added Mr Milligan. "The way China slows down causes problems for companies worldwide because it is exporting deflation."
So amidst all this volatility, which investments are likely to come up trumps in 2016?
Tech and pharma shares
Tech and pharma shares should do well this year - but outside that, investors should brace themselves for more 'normal' returns on stock markets, according to investment experts.
"In this climate, go for good quality, good franchise shares that pay strong dividends," said Mr O'Reilly. "Within equities, technology shares should do well - helped by strong jobs growth in the US and the proliferation of social media. Technology companies have a lot of cash on their balance sheets so they're more immune to interest rate hikes than others."
Microsoft is one of the main tech stocks being tipped by Davy for 2016.
Another tech share that could do well in 2016 is Nokia. "Nokia has a strong network business with sustainable margins at a time when customer demand is rising," said Mr Milligan. "It has a patent portfolio that is under appreciated."
Good quality pharma shares could be worth snapping up, particularly those of the US company, Lannett, according to Ben Jerman, senior equity analyst with Logic Investments.
"Lannett is a very fast growing company with a relatively robust balance sheet," said Mr Jerman. "We are convinced that it will roughly double its revenues after its recent acquisition [of Kremers Urban Pharmaceuticals] - and it may well become a victim of its own success and become a bid target."
Another share being tipped by Mr Jerman is US biopharma player, Baxalta. "It's very unusual to find such an attractively priced company that has also drawn takeover interest - with a strong possibility that the acquirer will return with an improved offer," said Mr Jerman.
Shares in the chemicals business, Covestro, could also be worth buying, according to SLI.
Japanese and European shares should do well on the back of US Fed hikes, according to Tom Elliott, international investment strategist of the financial advisers, the de Vere group.
The performance of these shares will be affected by the degree of monetary tightening by the Fed which Mr Elliott describes as "a broadly dollar-positive theme which will help boost euro zone and Japanese exports and the overall economic recovery of these regions".
Investors should lean their portfolios towards developed markets equities this year - in particular continental Europe "where corporate profitability has the greatest scope to recover", according to Pat McCormack, head of wealth and investment management in Barclays Ireland.
In the financial sector, Britain's Lloyds Bank is being tipped by Mr Elliott. "A generous dividend is on offer as the Government prepares to sell down its holding in Lloyds," said Mr Elliott. "Fears that regulators will demand more capital in its balance sheet are, I believe, misplaced."
Meanwhile, shares in defence companies could do well this year - if the European refugee crisis continues to escalate. "The more migration comes out of the Middle East into Europe, the more this increases spending on defence and security," said Mr Milligan.
The migrant crisis - and any further attacks by Islamic State militants - could however trigger volatility on stock markets.
"Events in the Middle East can impact on markets through oil prices," said Mr Milligan. "If some of the difficulties feed through to oil supply and demand, that could be an issue for markets."
Ryanair, Irish Continental Group (IGG) and Grafton are some of the Irish shares currently being tipped by SLI. It believes that Ryanair and Irish Ferries owner, ICG, will both benefit from lower oil prices - and the pick up in consumer spending.
"What consumers often want to buy when spending picks up is travel and entertainment - rather than clothes, cars and so on," said Mr Milligan.
The weak euro has also helped ICG because it has made Ireland a more attractive holiday destination for the British. ICG's passenger business has done well over the last year. Grafton's dominant position in the DIY market means it is well placed to benefit from the pick up in construction and DIY markets.
The Vanguard US Technology ETF (exchange traded fund - essentially a basket of funds) is one fund recommended by Mr O'Reilly for 2016.
The ConBrio Sanford Deland UK Buffettology Fund could also be worth investing in.
"While Britain's FTSE 100 is weighed down with global mining and energy stocks, which will likely hinder its progress in 2016, the British small cap sector is well positioned to take advantage of continuing moderate economic growth forecasts," said Mr Elliott.
"The ConBrio Buffettology Fund attempts to replicate Warren Buffett's investment style in the British small cap sector. It isn't cheap but it has performed well."
This could be one of the last good years for commercial property investors because demand is still high - and supply tight.
"The 5pc yield [investment return] that's still available on Irish commercial property will be hard to beat - particularly when compared to bonds," said Mr O'Reilly. "We're seeing strong demand for Irish commercial property - and for real estate investment trusts (REITs, or property investment companies listed on the stock exchange). A lot of large pension funds are looking to invest in commercial property in Ireland."
SLI expects returns on Irish commercial property to be about 8pc a year over the next three years - with much of these returns driven by strong economic growth in Ireland.
Choose your commercial property wisely though. "There's obviously some hotspots," said Mr Milligan. "Most of the capital cities around Europe are doing well."
Offices in Dublin, Amsterdam, Berlin, Munich, Lisbon and Barcelona are amongst the commercial property investments which SLI expects to do well this year. Prime shops in major British cities should also do well - along with high street shops in Stockholm and Germany, according to SLI. It is less keen on offices in Helsinki, Frankfurt, Prague, Singapore, Perth and the central business districts of Brussels and Warsaw.
More supply of commercial property is likely to come on stream in a couple of years - and this is expected to push yields lower from then.
"We are seeing cranes on the skyline in Dublin - but it looks like that supply won't come on stream until another two or three years," said Mr O'Reilly. "Commercial property is relatively immune to interest rate hikes in the United States."
Investors who prefer the alternative route could make money from hedge funds and private equity funds this year - because of the volatility that's expected on stock markets, according to Mr O'Reilly.
"We expect hedge funds to do well because they can short the market," said Mr O'Reilly. "Private equity funds should do well too as they can buy distressed assets."
Sunday Indo Business