Investment Outlook

New Year 2017

Continuing the trend from last quarter, economic data has improved, market sentiment has firmed and prices of risk assets have been marching higher. This is a welcome change compared with the investing environment that was in place at the beginning of this year when fears about China, U.S. rate hikes and weak economic figures led to a sharp correction in financial markets. Contrary to popular perception, this new market direction actually began before populist victories in the U.K. referendum and U.S. election. A number of trends that pre-date these events suggest that the outlook for the economy and markets has been improving since earlier this year and were further punctuated by Trump’s victory.


Economy

  • Continuing the trend from last quarter, economic data has improved and risks have diminished as concerns that dominated our thinking earlier in the year are much less pressing today.
  • The potential for a significant shift in U.S. public policy following Trump’s surprise victory will likely bring positives in the near-term through increased infrastructure spending, tax cuts and less regulation, but the benefits could be offset in the long term by higher debt loads and the possibility of greater trade barriers.
  • Reflecting the recent progress in the global economy, we have tweaked our growth forecasts slightly higher, though still below consensus, and expect better growth in 2017 compared to 2016.

Fixed Income

  • The surge in bond yields following the U.S. election was an extension of a trend that has been in place since the summer, when government bonds began to price in higher inflation and a bit better growth.
  • U.S. 10-year yields are now above our current estimate of equilibrium and, while our models suggest the potential for a further increase in yields over the long term, a further nearterm adjustment will likely be limited.
  • Valuation risk in fixed income markets has moderated, but we continue to expect sovereign bonds to deliver low total returns over our forecast horizon.

Equity Markets

  • Global equities were mixed over the quarter, with EM stocks heading lower, European stocks range-bound and U.S. markets moving to an all-time high.
  • A number of positive market trends that pre-date the U.K. referendum and U.S. election suggest that the outlook for the markets has been improving since earlier this year and were further punctuated by Trump’s victory.
  • Earnings troughed in the first quarter of 2016 along with the price of oil, and while there is still much uncertainty regarding the impact of a Trump administration on corporate profits going forward, the possibility for significant gains to earnings, and therefore equity prices, if everything falls into place shouldn’t be ignored.



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