Economic warming and political warnings...
Short-term interest rates remain extremely low given the relative health of both the U.S. and global economies. 2017 should be a year of global economic warming but also one of growing risks. However, with cash paying less than nothing in real terms in most of the world, investors should still be overweight long-term assets, with a tilt toward those that should do best in a world with somewhat stronger growth, higher inflation and higher interest rates.
- A trend toward stronger U.S. economic growth and inflation could be accelerated by President-elect Trump’s fiscal plans. This, along with a warming in the global economy, is positive for global equities and negative for fixed income. However, growing global debt, the rise of political populism and geo-political threats all still highlight the need for diversification.
- Interest rates should rise in 2017, but only at a modest pace due to sluggish global growth and very cautious global central banks. Investors may want to be long credit and short duration in their fixed income allocations.
- U.S. equities should continue to perform well in the year ahead, bolstered by stronger growth in GDP and earnings. While interest rate increases should not derail equity gains, they could define winners and losers in 2017 with cyclicals (such as financials and technology) outpacing defensives (such as utilities and REITs).
- Emerging market (EM) stocks and bonds are threatened by the potential for higher U.S. interest rates to produce a higher U.S. dollar. However, with attractive valuations relative to developed market (DM) assets and the return of a widening gap between EM and DM growth, EM assets clearly have an important role to play in producing long-term portfolio growth.