BNP Paribas Wealth Management has identified ten ‘Investment Themes’ to guide investors in search of a stable income and those wishing to invest in more dynamic products or new developments.
In 2015, the world’s developed economies grew at a moderate pace and this trend is expected to continue in 2016. Emerging countries, which for years have been the driving force behind the global economy, lost momentum. Investors need to be more selective during periods marked by disparate economic developments and the implementation of monetary support measures.
“The year 2016 will be characterised by extremely low interest rates, especially for bonds and central banks. In order to ensure their capital over the long term, investors will need to take greater risks,” argues Florent Bronès, Head of Investment Strategy at BNP Paribas Wealth Management.
Three Themes for defensive investors
1. The challenge of low yields: opportunities in European convertible bonds and high yield corporate bonds
Especially in Europe, where interest rates are not likely to rise by much, investing in these classes of bonds – via investment funds in order to benefit from high diversification – can generate satisfactory returns.
2. Opportunities for attractive income generation: investing in high dividend growers and European REITs
Equities issued by companies that are able to regularly increase the dividend they distribute to shareholders (especially high-quality cyclical stocks) currently provide good investment opportunities. One dividend-growing segment worthy of particular attention is that of Real Estate Investment Trusts (REITs) listed on European stock markets, which have been producing excellent results.
3. The challenge of low yields: the attraction of flexible solutions
‘Alternative UCITs funds’ – especially in the areas of ‘Long/Short Equity’ and ‘Macro’ strategies – and structured products offer promising alternative opportunities. These strategies are capable of providing attractive returns while limiting the sensitivity of the portfolio to the risk of interest-rate rises.
Seven Themes for ‘balanced and dynamic’ investors
Geographical play :
1. Buy cyclicals and value stocks to take advantage of the recovery in the euro zone
Europe is now in a recovery phase and will benefit from the weakness of the euro. Corporate profits, which are still very weak at the present time, should strengthen again over the next few years.
2. Selectively Invest in emerging economies
This field is extremely divers and investors will need to choose the markets in which they invest based on two criteria, targeting countries that are 1) major importers of raw materials and commodities and 2) implementing structural reforms. On this basis, certain emerging markets in Asia, such as India and Northeast Asia, and in Eastern Europe are likely to provide favourable investment opportunities.
3. Regime change in Japan is leading to shareholder value creation
The introduction of a Corporate Governance Code in June 2015 is designed to ensure significant improvements in the way companies are organised and run. Accordingly, Japanese companies’ return on equity (ROE) is likely to surpass its previous highs. One of the best ways to capitalise on this opportunity is to invest in companies likely to step up their share buyback programmes.
4. Digital innovation: the way forward in a low-growth/low-inflation world
This Theme covers fields including cybersecurity, robotics, online retailing and cloud computing, which are likely to see above-average growth, and where firms will be able to generate considerable cash flows from these innovations. Given the difficulty of spotting winners in these knowledge-intensive fields, investing through mutual funds provides the best option.
8. Surviving in the ‘Uber Economy’
The point of this Theme is to seek to identify sectors and firms that can manage to buck the ‘uberisation’ trend – i.e. basically those companies that are in a position to maintain or raise their prices due to entry barriers sufficiently high to deter competition from newcomers. Blue chip technology firms and sectors such as pharmaceuticals, luxury goods or alternatively consumer staples offer attractive opportunities in this respect.
9. Investing in companies undergoing transformation
Companies are facing major changes in their business environments with accelerating globalisation, new markets, significant technological innovations, the use of new tools, etc. Against this background, their ability to regenerate and transform rapidly is a major competitive asset. To help them adapt, companies may choose to adopt defensive strategies or expansion strategies.
10. Climate change: stock market opportunities
Public opinion and markets have become extremely sensitive to climate and other environmental issues, as illustrated by the recent COP 21 negotiations and agreement. The transition to more responsible, greener economies has already begun. In 2014, global investments in renewable energy rose by 17%. Companies offering innovations to help combat air pollution and global warming will have strong growth potential in the coming years. There are numerous investment opportunities here: renewable energy, energy storage techniques using compressed air, energy efficiency solutions both for industry and householders, and substitute fuels, to name but a few.
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