31 January 2017
Chief Economist and Head of GAM Investment Solutions, Larry Hatheway, comments on the outlook for the world economy and global equity and fixed income markets in 2017.
President Donald Trump’s administration has been welcomed by investors as a positive for the world economy. In addition to upward momentum and growth in the US, Europe and other parts of the world economy, the Trump administration promises tax cuts, economic reform and greater spending, all of which should propel growth forward. From that perspective, there are reasons to be optimistic. However, there are also risks. It is possible that the US economy could overheat as a result of stimulus against a backdrop of full employment. This would engage the Fed, force interest rates higher and potentially cause disruption. The protectionist elements of Trump’s programme could also introduce risk premia to the marketplace. Investors are, however, currently overlooking these risks.
The chief implication of this more benign backdrop is a rotation out of fixed income, particularly duration fixed income, into global equities. Within the equity market, there is also significant rotation away from high quality, dividend yielding stocks towards cyclicals, emerging markets and Europe. Overall, a great deal of dispersion has been introduced to markets, which active managers should be taking advantage of.
Implied volatility in global equities and other asset classes is close to historic lows, suggesting that investors are not very worried but there are some events on the calendar that should concern them, beginning with elections in the Netherlands, France and Germany. The question of populism, which has manifested itself in the UK and the US, will now appear in Europe and could change the course of policies there. Investors should also be mindful of the advent of protectionist policies and the possible naming of China or Mexico as a currency manipulator. At present, these risks are not priced in to markets but investors need to be cautious and heedful of pitfalls in the year ahead.
In terms of portfolio positioning, we have shortened duration in government fixed income markets, particularly in treasuries as well as in European government bond markets. Within equities, we have switched into cyclicals, including European and emerging equities as well as value propositions. We have also been enjoying a recovery of some oversold currencies, including the Swedish krona and the Mexican peso. Overall, we have positioned our portfolios at the beginning of 2017 for better economic and market outcomes and greater risk appetite amongst investors.
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