US and emerging markets look ripe for growth

Given that we’re at the start of a bright, shiny Trumpian new year I thought that before plunging into my main investment theme for 2017, I’d review what happened to my big idea for 2016: oil. This time last year I freely admit that I was far too cautious about the prospects for oil. In fact, I was still banging on about oil maybe bottoming out at $20 a barrel . . . eventually. 

I was horribly wrong on that score but I also argued that the time was right to start looking again at the likely survivors of the oil industry bloodbath, identifying five stocks that I thought had a strong enough balance sheet to thrive even in an environment of low prices: Royal Dutch Shell, The Wood Group, Cairn, Ophir and Riverstone. 

One year later these five stocks are up an average of 60 per cent with the smallest increase for Ophir at 9.35 per cent and the biggest increases for Riverstone, up 78 per cent, and Cairn, up 84 per cent. I believe there may be even more upside, especially for Riverstone, but for now I’m largely leaving oil alone and switching tack to broader themes. This year is shaping up to be tailor-made for the more adventurous among our readers, with a focus on riskier asset classes. 

At this time of the year I scan a great many of the strategy notes coming out of the big investment banks and asset managers and a consensus is beginning to emerge. The most recent findings of Parala, a research-led house run by my friend Steve Goldin, it echoes what many on Wall Street and in the City are saying: number one for much of the past year continues to be emerging markets equities, followed by US small-caps at number two, infrastructure equities at number three, followed by Asian equities excluding Japan at number four. I’ve already discussed Asian equities just a few months ago on these pages and readers will know that I am also a long-term bull on infrastructure funds. I think they are an increasingly attractive place to hide for income orientated investors fleeing the poor prospects for bonds as an asset class.

I’ll concentrate my thoughts this month on US small-caps and — crucially — emerging market equities. I have absolutely no idea if President Trump can deliver on his promises and I’ve also decided to stay away from pontificating about geopolitics. But if Mr Trump and a united Republican party can deliver on a more aggressive fiscal policy, tax cuts and infrastructure spending, then maybe the current rally in risky assets will seem justified. 

What is clear to me, though, is that many of his policies might be great news for smaller US domestic-focused business, and rather less so for mega large-caps with big globally diversified businesses. If that is the case, I think it might be time to refocus towards the Russell 2000 index, a market cap-weighted index of about 2,000 securities providing investors with a benchmark for smaller US companies. There’s a number of UK-listed exchange traded funds which track this index: the cheapest by my calculation is State Street’s SPDR Russell 2000 ETF (ticker R2US).

On the subject of emerging market equities, I prefer to focus on actively managed funds especially when it comes to investment trusts. My favoured fund is for more cautious, income-oriented investors, namely the Utilico EM fund (ticker UEM) which invests in transport and energy infrastructure stocks. It’s up 28 per cent this year, but the real star performers have been JPMorgan’s EM income trust (JEMI), up a cracking 59 per cent on the year and still yielding 4 per cent alongside Templeton’s EM trust (TEM), up 62 per cent. 

Mr Trump is openly scornful of leading emerging market economies such as China and Mexico and his policies have already had the effect of strengthening the value of the dollar against a basket of emerging market currencies. That’s bad news for US exporters, but good news for businesses importing from those emerging markets — the US trade deficit is also almost certainly going to increase. A strong dollar and a hard rightwing political outlook might be bad news for emerging market debt investors but if it results in greater US growth, it might be excellent news for many lowly geared emerging market businesses, spelling a steady expansion of their biggest market. 

I am a hardened cynic about everything Russian and absolutely anything to do with its strongman Vladimir Putin. I find the enthusiasm of Mr Trump and some Conservative politicians for the ruler of Russia utterly inexplicable

I’d be tempted to go for three investment trusts in the emerging markets area: BlackRock Frontiers fund (ticker BRFI), JPMorgan EM income trust and the JPMorgan Russia (ticker JRS). The first invests in frontier markets which tend to be smaller and less liquid than the big Bric economies. JPMorgan Income fund has an explicit income mandate I think might be useful (Somerset Capital also has an EM Dividend unit trust that could easily be substituted for this investment trust). 

Last, but by no means least, there’s that Russia investment trust. This needs some explaining as I am a hardened cynic about everything Russian and absolutely anything to do with its strongman Vladimir Putin. I find the enthusiasm of Mr Trump and some Conservative politicians for the ruler of Russia utterly inexplicable but even I accept that this local stock market may benefit from more stable oil prices and a changing geopolitical environment. 

Local stocks are notoriously cheap (usually for a good reason, in my view) and the economy is showing signs of picking up after a dismal few years. All in all, this market may experience even more gains (the JPMorgan fund is up 110 per cent in the last year) — if I were feeling especially adventurous I might be tempted to take a punt.

David Stevenson is an active private investor who often writes about his own portfolio. Where indicated, he has investments in financial instruments he is writing about. adventurous@ft.com