Aviva Investors has named five trade ideas for investors in 2017. The first is to hold emerging market small-cap equities. Aviva Investors head of investment strategy for the AIMS target return and target income funds, Ian Pizer, commented: “For much of the last decade emerging economies have driven world economic expansion. Despite the threat of rising protectionism following Donald Trump’s US election victory, we believe this trend will persist.” He added that increasing middle classes and greater spending on consumption should benefit EM small-caps, which are normally more stable than their developed world counterparts, due to greater domestic investor holdings. The main risk here could be a rising US dollar pushing up interest rates in emerging market economies.
Another trade is based on the South Korean yield curve which is one of the flattest in the world. Pizer said: “There is an opportunity to profit from the curve steepening by going ‘long’ of two-year, and ‘short’ of ten-year, interest-rate swaps.” A third idea is to go long on the US dollar versus the Japanese yen, given the contrast between a moribund Japanese economy and the reasonable health of the US economy. Pizer said more fiscal stimulus in Japan could weaken the yen while the dollar could appreciate in 2017.
Another possible trade is to go long UK high yield bonds which could benefit from economic tailwinds in the US and a risk-on environment. “With a coupon yield over 6.5%, we would expect US high yield to continue to be in demand from investors hungry for both yield and income,” Pizer said.
The final trade idea is to hold US inflation protection, as markets have been more concerned about deflation. “The prospect of rising US inflation explains the rationale for one of our favoured trades at present which is to be long of US Treasury inflation-protected securities and short of conventional Treasuries via the ten-year future,” Pizer said.