All eyes within the investment world will be on Donald Trump in the early days of his presidency, as the majority of equity markets continue to move upwards.
Post the surprise election result, consensus has suggested the new regime may be tougher for emerging markets and Asia, based on possible protectionist policies and a stronger US dollar as touted by Mr Trump in the election campaign.
However, this has seen these regions lag and has provided a good opportunity for investors to top up exposures.
At the same time investors should keep a close eye on developments in the bond market, with the rising yields seen since November suggesting the bubble may have finally burst. I am always careful in making such a prediction as yields have backed up before only to continue the bull trend, but bonds are now so expensive they appear to have reached an inflection point.
A range of factors have contributed to the sell-off, with inflation expectations edging up adding to a growing acceptance that quantitative easing (QE) and similar monetary measures may be losing their effectiveness and are coming to an end. One of the main effects of QE was to drive valuations up across the board, defying the traditional negative correlation between equities and bonds.
But rising bond yields point towards an increasing desynchronisation of returns in the future, which could extend within asset classes as well as between them.
If countries introduce frictions to international trade, their economies are likely to diverge and debt will be assessed on its own merits.
In this environment, it might help to have a more international approach to fixed income as there are areas that can provide returns against a backdrop of rising yields.
High yield is one such option, as is emerging market debt (EMD). The latter is sometimes best played via an index tracker; active management requires long-term patience and it seems there are insufficient active managers in the EMD space to access it that way.
But investors clearly need to seek other means of generating income and low-volatility returns, with options including real estate, long/short equity strategies and strategic bond funds.
This could also include amending the common alternatives strategy by splitting the bucket between absolute return funds (as a risk reducer) and hedge funds (to enhance returns), and changing focused exposures into more broader strategies. Global offerings could prove better with the antiglobalisation trade continuing.
In our own fund, we reviewed exposure in light of the deteriorating bond outlook, and made changes including removing a UK-focused absolute return fund and a currency portfolio given the sterling depreciation.
In terms of additions, we like the TM Fulcrum Diversified Core Absolute Return on the absolute return side, where we rate the large team headed up by former Goldman Sachs economist Gavyn Davies.
We have also added Jupiter Absolute Return in the hedge fund space. While most of our other holdings in this area are run by large teams, this is a play on the skills and track record of manager James Clunie.
