After the 2017 equity rally, Andrew Ver Planck – head of the newly integrated Systematic Equity team at MacKay Shields– is optimistic about the year ahead. While 2017’s strong returns will be hard to duplicate this year, equities are likely to remain one of the most attractive areas of investment in 2018, albeit more volatile than in the previous year. A systematic approach to investing may help capitalise on some of the opportunities ahead.

Global stock markets have ended 2017 on record highs. While the S&P 500 seems expensive at current multiples in comparison to its historical average, it has traded significantly higher historically in late cycle expansionary periods, such as today. A combination of steady economic expansion, accommodative monetary policy, deregulation, and continued strength in corporate earnings are supportive of equity markets. Deflationary forces have abated, while inflationary pressures remain benign allowing for an orderly and measured unwinding of the unprecedented monetary support that’s been building since 2008. However, expansionary monetary policy will likely not provide the tailwind to markets in previous years, but can act as a floor limiting downside risk to equity investors. A continuation of a slow-measured approach to removing stimulus from the system should not be disruptive to risk taking.

Risk and Volatility Remain in Sight

However, that’s not to say the economic environment and equities are free from a correction in 2018. Rather, we are moving into 2018 with lofty expectations and will not be able to lean on valuations in the event expectations are undershot, supporting an outlook of increasing volatility. Certainly the bond markets are signaling a bit of healthy skepticism. The yield curve is flattening with the long-end of the curve stubbornly entrenched signaling a lack of conviction in the pace of economic growth and the corresponding rise in inflation and interest rates.

Capitalising on Opportunities through Systematic Investing

The Systematic Equity investment team takes a long-term approach in building portfolios that we believe will add value over the long-term driven by bottom-up stock selection. Our process is quantitatively driven and rooted in research identifying long-term drivers of stock returns through a combination of valuation, momentum, and market sentiment measures. A return forecast is estimated for each security across the global equity universe. We integrate these stock level forecasts within a risk management framework targeting an expected level of risk in our portfolios. The process is not focused on making top-down calls across asset classes or within equities, but focuses on bottom-up stock selection within a sector, region and country. A balance of different factors helps the team ride out different market environments.