While interest rates remain very low, the risk of rising consumer inflation is top of mind for Brenner.
Economic growth causes a rise in consumer prices, but there is usually a lag of around 1.5 years before a price increase is observed, Brenner told International Adviser‘s sister website Fund Selector Asia.
2018 is likely to be the time when the global synchronised economic growth gets priced in, he added.
The force driving the market is mostly people’s expectation, rather than the inflation figure itself. “Market is expecting an annual inflation of 1.9% on a ten-year horizon and 50 basis points of increase would create a severe impact on the financial markets,” he said.
One way to hedge the inflation risk is diversification of the portfolio. “It can be achieved by giving up some upside potential in equity market while gaining protection in case interest rates go higher,” he said.
He added that he might want to give up the upside potential from tech stocks, in particular since they are at risk of being negatively affected by rising interest rates.
While tech stocks may suffer, inflation should be a positive factor for financials, according to Brenner, since their profits tend to rise with higher interest rates. The energy sector, which has suffered for years, will also benefit from higher oil and commodity prices.
To counter the risk of inflation in a bond portfolio, its duration should be minimised while favouring investment grade debt over high yield.
Brenner said he believed that the positive environment in the global equity market would continue in 2018 due to strong corporate earnings but overall equity returns will drop below 10 percent.
Within the emerging markets, China will still be preferred as the next year is likely to be a continuation of its five-year period of steady growth.
Chinese authorities’ efforts to lower the level of corporate leverage may bring some attractive investment opportunities due to the strong fundamentals of the companies, according to Brenner.
“Valuations in emerging market equity are still more attractive than those in the developed markets due to the strong growth in corporate earnings,” he added.
However, the interest rate hike in US might drive the currency to appreciate, resulting in a negative impact in emerging markets. Brenner said he would consider a reduction in emerging market holdings due to a strong US dollar.