The geopolitics of North Atlantic nationalism and protectionism took us by surprise as much as anyone as we were confident that the status-quo would prevail in both the U.K. and the U.S. during 2016.
Our cautionary stance on the markets of the developed economies was generally correct through the U.S. presidential elections as fixed-income outperformed equities, and emerging markets outperformed developed markets in both asset classes. The reversals post elections while equally surprising to us have not altered our global themes materially, and in fact across fixed-income markets provided some attractive opportunities for tactical allocation of cash.
We remain concerned about the age of the economic cycles in the developed economies with exception of Australia, Canada, and Japan. The U.S. expansion is now entering its 91st month and our macro indicators, models, and valuation metrics are signaling mostly red. Our view remains that the structural forces for the “New Normal” are firmly in place as labor force growth and productivity gains continue to slow. We view proposals coming from the new administration more as “financial engineering” than “structural impacting” and as such believe any acceleration in growth is likely to be short-lived, consumption driven with little real impact on investments and jobs.
We are equally cautious towards most of the Euro-zone and even more so for the U.K., as Brexit negotiations begin an arduous, drawn out process that will be longer and more volatile than markets are assuming and will end up in a lose-lose outcome. Southern Europe may surprise market watchers to the upside, and Northern Europe will likely benefit from the weaker Euro with overall growth in the zone outperforming expectations. We are however, very mindful of the aging cycle especially in Germany.
Emerging markets will remain the bright spot across the board. China, and India’s leadership will find 2017 friendly grounds, while Brazil’s un-popular leadership will have a cooperative legislature and approving financial markets for a continuation of reforms. Economic cycles are in favorable stages for much of Asia, Latin America and Eastern Europe, Middle East and Africa (EMEA). We are also very positive on commodity prices and believe the Australian and Canadian economies will be major beneficiaries. Japan, also a favorite of ours, has politics, trade with Asia, and favorable cyclical standings as tailwinds behind it.
Our primary concerns for 2017 remain the geopolitics of the North Atlantic and its potential impacts for global growth and trade. The incoming U.S. administration, and elections in the Netherlands, France, and Germany point to further gains for protectionism, be they direct and visible or indirect and stealth.
We continue to favor fixed-income over equities, and emerging over developed markets. At the sub-asset class level; in developed markets we favor value over growth, large-cap over small-cap, and investment grade debt over high yield with the reverse in emerging markets. We are over-weight energy and materials globally, staples and healthcare in developed markets, and financials, technology and cyclicals in emerging markets. In commodities, we are over-weight agriculture and energy and under-weight metals.
To read our full 2017 Outlook, please click the “PDF” button below.
As always stay tuned;
Chief Investment Officer
January 1st, 2017
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non- investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The information and data contained herein was obtained from sources we believe to be reliable but it has not been independently verified. Past performance is no guarantee of future results.