This publication is carrying a series of collections of the wealth management industry's forecasts for 2017. Also, the editors remind readers that this news service will not now be regularly updated until 2 January, 2017, and we wish you all a happy holiday season.

It is safe to say that 2016 has been a year filled with bouts of market turbulence, uncertainty and unexpected outcomes. In June, we saw the UK take the decision to exit the European Union, sending the currency markets into chaos. Last month, US citizens voted hotel tycoon and political underdog Donald Trump to take over the White House in an election that very few of us predicted the outcome of, highlighting how underestimated the power of the anti-establishment is. What was more shocking than both of these historic political events, however, was Leicester City winning the English Premier League back in February after a fairytale season of football.

Jokes aside, in an attempt to do the impossible and predict the future, wealth managers from around the world have gazed into their crystal balls and conjured up some projections for 2017. Below is the first of a series of outlooks for next year, and this news service is scheduled to publish another run shortly after the new year so keep your eyes peeled.

Heartwood Investment Management

Fixed Income: David Absolon

Reflation and the passing of the baton from central banks to governments are two themes that are likely to be the key performance drivers of global fixed income markets. Moreover, both of these trends are expected to contribute to stronger global growth in the first half of 2017, with the US economy taking the lead based on expectations of significant fiscal expansion. Stable growth in China and grinding recoveries in the eurozone and Japan should also help to support an improving global backdrop. The exception to this trend is the UK, which is mired in Brexit and where downside risks to growth have increased.

Global deflation concerns have lost momentum, thanks to the recovery in commodity prices, and the trend of gradual, but not accelerating, reflation should continue in 2017. Core inflation is likely to drift higher in the US, although remaining well anchored as the strength of the US dollar is maintained. Headline inflation measures will be sensitive to the base effect of energy prices, most likely felt in the first quarter, and this may lead to some volatility at the headline level. Wage pressures are expected to rise moderately across developed economies as labour market conditions have tightened progressively over the past couple of years, especially in the US.

The US economy provides the strongest prospects for meaningful fiscal expansion, given plans for a $1 trillion plus infrastructure boost. However, hopes of a coordinated global fiscal pact remain a pipe dream. A ballooning budget deficit keeps the UK government timid about freeing the fiscal purse strings, as eurozone governments also show a lack of ambition.

Global central bank policy will remain accommodative, but unlike the past couple of years, and following questions around the role of central banks and the effectiveness of their policies, we are unlikely to see the injection of massive liquidity into financial markets. Those days appear to be over and we expect central banks to take a more balanced tone.

Developed sovereign bond yields are expected to rise, led by the US, but the trend will be capped by ongoing structural demand and the safe haven status in an environment of higher political risk premia. We are cautious about rising leverage in US corporate markets and continue to search for value where we opportunities for fundamental improvements. Notwithstanding headwinds around US policy uncertainty, emerging market sovereign debt is a long-term opportunity based on structural economic improvements.

Equities: Michael Stanes

Populist politics has been the theme of 2016 and will likely remain in place over the next few years. Donald Trump’s election has shifted the narrative of markets, where perceptions are now focused on a pro-growth policy agenda and reflation.

As investors consider the implications of a shifting political climate, there is a risk that expectations for a significant growth boost are overstretched. In reality, we have yet to see any actual stimulus being implemented, although the political hurdles of delivering fiscal expansion have been reduced in the US.

We will retain our preference for value, overweighting the cyclical markets of Europe and Japan. Europe and Japan represent good value relative to other developed markets and should benefit from an improving corporate earnings backdrop. For various reasons, Europe has been a market that has not been favoured by global investors on worries about political risks, slow growth and a fragile Italian banking sector. Acknowledging that any one of these risks could erupt at any point to undermine sentiment, we are reassured by the fact that financial markets are better supported by policy measures already in place, with the European Central Bank acting as a backstop. The credit cycle remains pivotal to the eurozone’s recovery, where progress is being made, albeit slowly. Financial conditions remain very loose as the ECB continues to purchase assets in early 2017.

Japan is another unloved equity market based on a lacklustre macro environment and disappointing policy outcomes, whether through ‘Abenomics’ or the diminishing impact of Bank of Japan stimulus. Our reasons for investing, though, are less beholden to policy expectations, but focused on the micro story, where corporate governance developments are driving efforts to improve shareholder value. We also believe there are interesting opportunities to be found in the ‘New Japan’, which includes domestically-focused sectors positioned to benefit from ageing demographics (healthcare and consumer discretionary) and digital advancements.

We expect to be maintaining our modest overweight to US equities, although exposure will remain targeted to specific areas: domestically-exposed small caps and sector opportunities in industrials. A significant amount of global money has been invested into US equities, driven by expectations of higher US growth, gradual reflation and a positive sloping yield curve. We expect this positive momentum to be maintained in early 2017, reinforced by expectations of improved corporate earnings growth, given the fading effects of the commodity price adjustment and a stronger US dollar.

Inevitably, US politics throws up uncertainties under a Trump presidency and the risk of disappointment or of a policy blunder remain significant. On balance, though, we take a more optimistic view. If Trump’s policy priorities are focused on recharging US growth and bringing forward spending, then this is likely to boost US equities at the expense of the US treasury market. Furthermore, the Republican Party’s control of both the presidency and Congress increases the likelihood that economic measures will get implemented, plus Congressional Democrats are likely to support infrastructure spending. Any vacillation in advancing the pro-growth agenda will be more related to tax cuts, where there is less of a consensus between the two parties. However, tax incentives to repatriate US companies’ global earnings could add further support to US equities, as well as drive merger and acquisition activity and share buybacks.

Downside risks to growth in 2017 and Brexit vulnerabilities keep us underweight in UK equities in the near term. We will remain focused on large-cap exporters in the near term, although domestically-focused smaller companies could provide opportunities over the medium term as we see more visibility around Brexit and a stable currency. Over time, we are likely to look to repatriate assets back into UK equities, although the post-Brexit bounce has delayed that prospect as overseas investors were attracted into the market by a weaker sterling.

A key question for global equity investors in 2017 is what will be the impact of a shifting political and economic environment on emerging market equities? US policy uncertainty will keep EM sentiment vulnerable in the near term on further talk of imposing trade barriers, although a measured Federal Reserve tightening cycle is unlikely to act as a significant constraint on EM economies. The era of advancing free trade agreements appears to be over, at least for now. We already know that the US will issue a notice of intent to pull out of the Trans Pacific Partnership Agreement, but this move might not be all bad for China, acting as the regional pivot and reinforcing supply chains within Asia. If the US were to abandon the North American Free Trade Agreement, this would have a more meaningful impact on broader EM sentiment, not just Mexico. Away from US-exposed EM economies, there are diversification opportunities in Eastern Europe, which are positioned to benefit from recovering eurozone demand.

We are retaining our modest overweight allocation to EM equities with a view to increasing exposure as we see more clarity around the policy environment. We believe that an allocation to EM assets represents a long-term opportunity due to structural economic improvements – low budget deficits relative to GDP, current account surpluses and the buffer of ample foreign exchange reserves – and opportunities through the development of banking systems, telecommunications and consumer services. Valuations are not expensive relative to developed markets and there is more scope for corporate earnings improvements, given cyclical improvements in late 2016.

Commodities: Jade Fu

Compared with the start of 2016, our view on the commodity complex has become more constructive, owing to fundamental improvements that are being driven by a tighter supply/demand balance. Moreover, the significant price shock since mid-2014, coinciding with the end of the commodity super-cycle era, appears now to be accepted by investors and expectations have been reset. Perceptions of increased fiscal spending the US and policymakers’ commitment to revive growth have further boosted sentiment towards commodities.

Notwithstanding this more positive outlook, we believe it prudent to remain underweight in commodities from a portfolio construction perspective. Direct access to this market is through owning futures contracts rather than owning the physical asset. However, the risk/return profile is unappealing, in our view, due to the way these contracts are currently priced. The spot price trades below the futures price and as these contracts expire and are rolled forward this presents a negative yield. We prefer to take indirect exposure to commodities through other asset classes (equity and debt). That said, we will continue to hold a modest position in gold in certain strategies for diversification reasons

In energy, the evidence suggests an improving supply and demand outlook in the first half of 2017, driven by falling rig counts in the US and more stable growth in China. OPEC’s decision to cut supply to 32.5 million barrels per day does not shift the outlook materially, although it marks an important step in maintaining OPEC’s credibility with the markets and should support sentiment in the near term. It is worth remembering that even with the OPEC reduction, the supply of oil is still higher than a year ago, and continues to remain at a multi-year high. Oversupply remains a persistent theme in longer term and will keep a lid on prices. Furthermore, as oil prices recover, US shale supply is likely to increase given how quickly and efficiently production can be resumed.

Industrial metals prices have rallied strongly since the US election and may now be over-extended, given much of it has been driven by momentum and sentiment. Nonetheless, the fundamental outlook for industrial metals has improved on supply constraints, with the closure of mines and the reduction of inventories. While demand remains sluggish, further economic improvements in China and expectations of US fiscal expansion could add support to the market. However, there is a risk that policymakers in China could impose tighter controls on the property market - an important bellwether of demand for copper and steel - which would be negative for base metal prices.

Our view remains constructive on precious metals, although performance closely follows the perceived course of global monetary policy. A lower for longer environment will be supportive for precious metals overall. However, if inflation expectations were to accelerate as well as the pace of Federal Reserve rate hikes, the environment could be more challenging. Our central view, though, continues to expect both gradual tightening and reflation.

Alternatives: Charu Lahiri

Brexit adds a layer of uncertainty for UK commercial property and will accelerate structural headwinds that had already emerged before the referendum. Even prior to the UK referendum result, there were signs that some areas had become overheated, such as London offices and commercial and retail property in the South East, where – in certain areas - yields had fallen to pre-2008 crisis levels against a backdrop of supply constraints and low vacancy rates. Significant levels of capital flows since 2012 had also risen to record highs.

The full impact of Brexit continues to be assessed across property markets with varying signals. Clear signs have emerged from buyers that assets secured by long term, inflation-linked income streams are maintaining their value, as are ‘specialist’ investment vehicles. Elsewhere, developers have suffered materially and some prices are looking distressed, offering potential tactical opportunities on a medium-term view.

We expect to maintain our underweight allocation to this asset class, keeping a focus on diversification and selectivity. We hold exposure to regional offices and industrials, which should benefit from rising rental income growth due to supply constraints and falling vacancy rates. These markets are expected to be more insulated from a ‘hard’ Brexit scenario plus benefit from lower business rates - whereas London retailers contend with higher rates. From a macro perspective, we expect the Bank of England to maintain interest rates at historically low levels, given downside risks to growth - though not at recessionary levels - which should underpin demand for higher yielding assets. Sterling’s depreciation is likely to boost the attractiveness of the UK market to international investors. Notwithstanding Brexit noise, UK property continues to attract international buyers due to its “safe haven” qualities and the UK’s robust jurisdictional and legal framework.

Outside of the UK, other markets are less attractive from valuations perspective. However, in the US, the real estate investment trust market has been susceptible to negative sentiment due to reflation and higher growth expectations. Valuations remain at the higher end of the range on a historic basis, but should this selling pressure continue to build, we may find a potential entry point.

In hedge funds, we have held a natural bias towards macro/CTA strategies, which we expect to benefit from greater global monetary policy divergence. Steeper yield curves also provide a better opportunity set for arbitrage-orientated macro strategies. Furthermore, we expect to see increased dispersion in equity market performance, which is also beneficial to most arbitrage strategies. We favour managers looking to trade around volatility rather than making long directional bets.

We are finding opportunities to participate in directly funding infrastructure projects and supplying loans to small- and medium-sized enterprises. There has been a secular change in the corporate lending space since the 2008 financial crisis as banks have retrenched from the market, resulting from regulatory and capital requirement pressures. This gap is now being filled by specialist alternative lenders. These strategies offer a yield premium over higher yielding corporate bonds, often have lower default and higher recovery rates, and typically have a low correlation to broader equity and bond markets.
 

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PineBridge Investments

In 2017, investors will need to keep an eye on the rise of political risk in the developed world, particularly in the US and Europe, which could depress growth and raise market volatility. Markus Schomer, Chief Economist, is looking for a move in monetary policy away from excessive stimulus in the developed world and toward a more balanced stance that will gradually turn into policy normalization in the next few years.

“There should also be a gradual shift toward growing business investment – as long as interest rates remain low – instead of labor expenditures. Overall, the team expects a moderate reacceleration in global economic growth from the 3% average in the past two years to 3.4% in 2017 and 3.7% in 2018,” said Schomer. For US GDP, growth forecasts have been raised to 2.7% in 2017 and 2.9% in 2018.

Multi-Asset: Fasten Your Seat Belts, It’s Going to Be a Bumpy Regime Change

“The year ahead marks several simultaneous secular turning points including the initial signs of deleveraging ending in the US. A net plus to global growth with more meaningful differences to regional, sector, asset class, and factor winners and losers is a healthy backdrop for seeking alpha from choosing beta,” said Michael J. Kelly, Global Head of Multi-Asset. “When the two largest economies – the US and China – pivot from slowing to revving up, take notice. Several other simultaneous regime changes are also likely to be fellow travelers.”

While the US equity market previously appeared modestly overvalued, after-tax cash flows will now be worth more if taxes are meaningfully reduced. US GDP should also accelerate from a host of factors. Given US small-cap and value stocks’ economic sensitivity, their attractive valuation is now being complemented with improving fundamentals by the second half of 2017, when tax rates should decline.

Countries with accelerating and domestically sourced growth – like India and Indonesia – provide compelling opportunities. Commodity producers should be big winners with infrastructure programs working their way through the pipeline. Risks to the outlook include trade negotiations spiralling into a global trade war, an inflation scare (but not an actual spike) emanating from the US, sluggishness in Europe and Japan, where negative interest rates and commensurately low output gaps persist, and China rethinking its faster trajectory.

Fixed Income: Investors Return to Coupon-Clipping in a Shifting, More Uncertain Environment

In 2017, PineBridge expects fixed income returns to decline while tail risks increase. More caution is in order given the likelihood of volatility flashpoints related to rising political risk in developed countries as well as a limited valuation cushion to absorb market shocks.

“With political risk and a transitory environment of monetary and fiscal policy we can expect heightened bouts of volatility to impact investing in fixed income. Investors must capture incremental alpha opportunities both across and within asset classes through micro views and security selection,” said Steven Oh, Global Head of Credit and Fixed Income.

Across developed markets investment grade, US dollar credit is preferred over European credit with Treasury Inflation-Protected Securities (TIPS) as a defensive portfolio hedge, given higher US inflation risk. In leveraged finance, loans are favored over high-yield bonds on a risk-adjusted basis, with the US more attractive than Europe. In emerging markets, hard currency investment grade bonds over high yield segments are recommended for 2017, along with a targeted approach toward local currencies.

Equities: A Return to Fundamentally Driven Investing

The period of sharply falling earnings estimates for 2017 appears to have ended, with an increase in the number of companies seeing positive revisions, which should restore investors’ confidence in the broad equity market. The slump in emerging markets may be ending as many of the main factors that led to underperformance are now stabilizing or even reversing, and infrastructure spending ramps up in Asia. However, risks to equity markets remain with the uncertainty around US trade agreements or a potential disorderly increase in bond yields.

“We see equity flows pivoting to active strategies in a market driven by fundamentals where selectivity will be key, as global growth accelerates,” said Anik Sen, Global Head of Equities.  “We maintain a high conviction on technology-related investments, small and midcap stocks, the US regional banks as well as in industries that benefit from infrastructure spending.  In emerging markets, China is a bright spot with attractive secular growth in a number of sectors, and our positive view on India and Brazil, in particular, remains unchanged.”
 

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Miton

UK – Gervais Williams

“During 2016, the fluctuations of the equity market were principally driven by the expected impact of Brexit and the election of Donald Trump as US President.

“In 2017 investors will have to address the reality of these challenges. We believe the greatest challenge will be correctly identifying the stocks that remain well-positioned to generate ongoing dividend growth in spite of the changing political and economic agenda. These factors are all the more relevant at a time when world growth remains subdued, and profit margin pressure is becoming more evident in a range of industrial sectors. Many plc’s are already paying out most or all of their internal cashflow, so any trading disappointment as economic changes come through will likely be reflected in further dividend cuts.

“With market valuations so high, and bond yields now rising, the performance penalty for holding the wrong stocks could become much more significant. Active fund managers not only need to continue to find winning stocks, but also need to be sure footed in steering their clients’ portfolios around the setbacks amongst those that get caught out.”

US - Nick Ford

“The stars are aligned for a strong upward move in US stocks in 2017. Since Trump’s surprise victory the S&P 500 has risen 6%, but the move has been driven by stocks in the lower echelons of the index - including previously out of favour sectors such as transportation, materials, banks and machinery. Blue chip growth stocks, formerly prized for their safety and stability, have lagged. This sector rotation is a very bullish development because it shows investors have started to position their portfolios for a pick-up in economic growth.

“There should be two major catalysts for US equities next year. First, a complete revaluation of stocks based on US corporations paying a far lower tax rate. Earnings per share for companies deriving most of their business at home could rise by 10%-20% as the new President cuts Corporation Tax. We don’t believe this outcome is currently priced into valuations. Second, we expect the improving economic outlook will encourage US CEOs to boost capital expenditures - an outcome which should create a virtuous cycle.

“These catalysts have major implications for portfolio construction. The biggest beneficiaries of Trump’s proposals should be domestic small and mid cap companies, as they are higher tax payers and stand to benefit most from an acceleration in GDP growth.”

Europe - Carlos Moreno

“The European economy is likely to remain sluggish, with little inflation. As in the US the working age population is falling and productivity growth is on a long term down trend. Credit demand is weak and investment levels are low. On top of this there is the political risk of a populist government in a major European Union country seeking to exit the Euro. Many economists are sceptical of the long term sustainability of the Euro system as it currently stands.

“It’s not easy to be positive on the European economy, but there is no shortage of strong company growth stories. As stock pickers (not economists) we aim to run an economy balanced fund. We look for quality businesses whose best days are ahead of them. They are characterised by pricing power, high returns on capital, big competition ‘moats’ and substantial potential to grow volumes and expand margins.

“We like companies that are expanding globally from a European base, yet which trade at a substantial discount to their intrinsic value. Many of these names are medium sized and we will continue to have a substantial mid cap bias. Europe has many of these great businesses in areas such as branding and hi tech engineering. Family shareholdings are common, which we like very much in contrast to Anglo Saxon short tenure, heavily short term share optioned, CEOs.  Ferrari the sports car manufacturer, is a perfect example of these attributes and is a top 3 play for us.”

Multi-asset – David Jane

“Broadly we think the world economy will be stronger in 2017.  At the same time it’s reasonable to expect bond yields and inflation to be on a rising trend.  In this context we expect to be positive on equities, with profits rising as revenues start to accelerate.

“We’d favour developed markets, cyclical industries and inflation beneficiaries versus the ‘defensive’ and ‘bond proxy’ areas. Regional differences may not be as important as they have been in recent years, although if the US dollar remains strong then Europe and Japan may continue to benefit from a weaker currency.  We expect sector differences to dominate, with financials outperforming on the back of rising bond yields and less regulatory pressure.  We expect industrials and materials to remain strong on the back of a favourable environment for corporate capital expenditures and government infrastructure spending.

“2017 may be a year when all the risk is to the downside in bonds.  With rising short-term interest rates and increasing inflation, the outlook for longer-dated government and corporate bonds could be very negative.  At the same time the prospects for highly leveraged companies could worsen as refinancing costs increase.  We would favour short-dated corporate bonds as there is lower risk of loss than in longer maturities.  Simply earning the yield to maturity could be the best that can be achieved as rising interest rates lead to capital losses and credit spreads have little room to narrow further.”
 

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BlackRock

US-led reflation − rising nominal growth, wages and inflation – is expected to accelerate, and fiscal expansion is expected to gradually replace monetary policy as an economic growth and market driver around the world, according to the BlackRock Investment Institute’s 2017 Global Investment Outlook.

Key highlights:

Reflation implications: we see reflation taking root and believe global bond yields have bottomed. As a result, we prefer equities over fixed income and credit over government bonds. We see higher yields and steeper curves, and favour short- over long-duration bonds and value shares over bond-like equities.

Low returns ahead: structural factors such as ageing societies and weak productivity growth have led to a drop in economic growth potential. We see these factors limiting how high real yields can go and see rewards for taking risk in equities, emerging market (EM) assets and alternatives in private markets.

Dispersion: we see the gap between equity winners and losers widening. A more unstable relationship between bonds and equities signals a regime change that challenges traditional diversification.

Risks: political and policy risks abound. There is uncertainty about US President-elect Donald Trump’s agenda, its implementation and the timing. French and German elections will test Europe's cohesion amid a forest fire of populism around the world. China’s capital outflows and falling yuan are worries.

Markets: we see developed market equities moving higher in 2017 and prefer dividend growers, financials and health care. We like Japanese and EM equities but see potential trade tensions as a risk. In fixed income, we favour high-quality credit and inflation-linked securities over nominal bonds.
 

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BNY Mellon Investment Management

In its annual Markets Outlook experts from BNY Mellon’s investment boutiques provide their diverse and distinct views for the year ahead. A common theme shared amongst the investment boutiques is that politics will carry on driving markets and investment. Markets 2017 also states that central banks continue to adopt ever more radical interventions in an effort to re-spark sustained economic growth. With stubbornly low yields across traditional asset classes, the next 12 months will offer as many challenges as opportunities.

Peter Bentley, head of UK and global credit, Insight Investment, looks at the environment for fixed income investors in developed markets: “From a top-down perspective, investors increasingly need to be aware of political event risk. The surprise outcome of the UK referendum and US election highlighted this. In 2017, Germany and France both go to the polls in an environment in which fringe separatist political movements are looking to consolidate their growing support.

“We expect the default environment for investment grade issuers to remain benign in 2017, with positive growth and low yields allowing issuers to refinance their debt at attractive levels. Strong investor demand is also evident, even at these low yield levels.

Commenting on central bank intervention Bentley adds: “While we expect monetary policy to remain supportive of credit markets, we believe speculation over policy decisions may create volatility in credit spreads. We think investors able to implement absolute long or short directional exposure could exploit this. Credit easing initiatives, such as targeted long term refinancing operations (LTRO) in Europe and the term funding scheme (TFS) in the UK will relieve pressure on banks from the low policy rate environment.”

Looking at risks and growth expectations in the Eurozone Rowena Geraghty, EMEA sovereign analyst, Standish Mellon Asset Management, commented: “France’s unruly elections demonstrate how the sources of political risk facing the eurozone are shifting in 2017 from the European Union’s peripheral member states to those at its core.

“In the short-term, despite geopolitical risks, we still expect the eurozone economy to grow by 1.2% in 2017, down slightly from the 1.5% growth rate for 2015 and 2016. This forecast is somewhat below the ECB’s growth forecast and reflects what we see as some evidence of stress in confidence, such as underwhelming manufacturing PMIs. We also expect eurozone inflation to tick up to 1.0% in 2017, from 0.1% in 2015 to 0.2% in 2016, prompting further easing from the ECB beyond the scheduled end of its asset purchase programme in March.

“The 2017 elections may be another step in the realignment in the politics of core Europe; not between right and left or east and west but between the pro-globalisation governing elites and a middle class that no longer sees its interests being represented by the elite.”

Against this backdrop Nick Clay, global income equity manager at Newton Investment Management, discusses where investors can find sustainable dividends in 2017: “The year ahead looks beige and likely to follow the same trend of the past few: a continuation of uncertainty, market and asset class volatility, low growth and central bank interference. It will be an environment where although there appears to be less risk, in reality there are plenty. Against such a backdrop, the sustainability of income remains vital.

“The nature of the current globalised economy means for developed markets there will be a greater focus on capital light companies featuring strong barriers to entry, providing them with the protection to fight off potential competition and disruption. These types of companies look positive for the provision of sustainable dividends over the year ahead, even as market valuations and volatility remain high.”