“Prediction is very difficult, especially about the future”
Niels Bohr (1885 – 1962)
In keeping with the famous quote above, our outlook for stock markets in 2018 is unashamedly honest; it’s very difficult to predict.
However, we have an opinion of course, and one based largely on facts and valuations, that the chances of a market setback appear greater than the chances of the markets continuing to rally uninterrupted.
We’ve written many times in the past 12 months why the markets have been heavily distorted, and we expect it to end badly at some point. But of course ‘at some point’ could be tomorrow, or it could be in many years’ time. It would be foolish to sit with copious amounts of cash and wait; never more so than in today’s environment of low rates and upwardly mobile inflation. We can’t afford to surrender real returns to fees and inflation.
However, nor must we fall into the trap of FOMO (Fear Of Missing Out) or indeed believing that because ‘equities are the least worst asset class’ somehow makes them an ‘all-in’ investments. Of course, we must be observant of broad market risks, but we mustn’t get too fixated by often erroneous expectations of the market direction.
Market movements will be influential in determining aspects of our performance, as not carrying any beta in a portfolio would be almost impossible, but what we must try and focus on is bringing investments into the portfolio(s) that represent good value, for today and tomorrow. This we feel gives us the greatest chance of delivering returns irrespective of the wider market behaviour.
Our latest addition that we feel falls into such a category is that of Hammerson (HMSO); a REIT with a portfolio value of over £10bn and passing rent of nearly £400m. It pairs with our existing cyclical REITS of Land Securities and British Land.
Hammerson, like LAND and BLND, trades off a very attractive discount to its net asset value due to the sector being out of favour. The NAV for 2017 is forecast to be 774p (JP Morgan estimate) and yet trades around 535p and yields circa 4.6%.
In a week when Debenhams and House of Fraser made the news for all the wrong reasons, it may seem brave to promote such an investment. However the current price has been driven down by an already weak US mall market, and further still, is pricing in around a 12.5% fall in total portfolio rents over five years. Not quite an Armageddon assumption, but a very bleak one. It gives us comfort that we don’t need the economic data to be perfect; we would be very satisfied if it were just less bad than expected.
HMSO also has exposures in France, which chimes with investments we have elsewhere in the portfolio focused on developed Europe, attempting to capitalise on the undervaluation of the Euro for the stronger economies. It has been a very supportive tailwind for economic growth.
If we believe that making predictions, especially about the future, is troublesome, then at the very least we can give ourselves far more than a puncher’s chance of making money in 2018 by securing healthy yields on attractive valuations.
We feel prepared for, and look forward to, what 2018 may bring.