Market Outlook: 2017’s Three Investment Themes Remain Intact
BNYM believes there are three main investable themes for investors.
The first theme is one of synchronized global reflation and strengthening fundamentals. Recent data have pointed to a synchronized strengthening of global economies which tends to support growth sensitive assets, particularly equities. Fundamentals remain strong and there are few signals of a looming recession. Beyond the United States, economic conditions in Europe and Asia have improved, are accelerating, and recent data releases suggest these improvements can be sustained throughout 2017 and 2018. Equities tend to do quite well in growth environments. BNYM believes that overseas markets, including Europe, emerging markets and Japan are poised for outperformance.
While the U.S. recovery is in its ninth year, other countries are in earlier stages of the economic cycle, particularly Europe, Japan and emerging markets. Investors looking to boost capital appreciation and leverage cyclical growth are advised to allocate a portion of their capital to faster growing markets, both equities and fixed income. As recovery in European and emerging economies boosts U.S. corporate earnings, investors should look to invest in U.S. and global sectors, which benefit from this trend.
The second theme for the economy remains the potential for rising interest rates. The synchronized global growth profile also points to an unanticipated new dynamic—possible convergence, if fitful and slow, in global central banking as the Fed, ECB and BOE have signaled intentions to normalize policy.
Fixed income remains very expensive as economies have enjoyed a sea of liquidity for the last few years. A tightening cycle threatens fixed income portfolios with duration risk, which is unlikely to be compensated given current price levels. Unaddressed, rising interest rates can jeopardize both the income seeking and capital preservation goals of investors.
We believe that investors should reallocate capital towards unconstrained multi-sector fixed income products and increase global fixed income market exposure. In addition, investors should look to increase holdings of floating rate corporate debt, private debt, and investment grade corporate credit, laddered bond structures, and other “hold-to-maturity” strategies.
Finally, the third investment theme remains policy uncertainty and the risk of greater market volatility. Policy and economic risks abound. The pace of rate increases and the risk of over-tightening or under-tightening, fiscal implementation and effectiveness, potential trade disruptions, and geopolitical flare-ups are all sources of tail risk.
The ambiguity inherent in policy choices could magnify downside risks to assets globally. U.S. markets are currently pricing in a greater than 50 percent chance of a tax overhaul, which puts downside risk to markets should the plan fail to make its way through Congress.
Alicia Levine is a portfolio investment strategist for BNY Mellon Investment Management.