The age-old lesson of investing has once again proven prophetic.
High-net-worth investors have been reminded once again, that they need to look past short-term market volatility when measuring portfolio performance.
Last year was an eventful year as 2016 started off with concerns about the restructuring of the Chinese economy and culminated with one of the most controversial US presidential elections in recent memory, with the shock of Brexit in the interim.
However, in hindsight, investors who let themselves get distracted by “negative” geopolitical events risked missing what was happening in the markets, where nearly all asset classes moved higher.
So, what should investors expect in the second half of 2017?
We highlight four themes that we believe will in uence the global economy over the coming months.
The first we refer to as “the divided recovery”, highlighted by the rise of populist politics in 2016. In the case of the US, president-elect Trump stormed into the White House, promising to make America great again.
While some of his campaign promises might boost economic growth, they also risk ushering in an era of in ation and rising interest rates. Trade restrictions could protect some US industries, but hurt others that rely on international supply chains.
The key for investors is to stay diversified so they can bene t regardless of the outcome. If growth accelerates, equities may thrive; if political uncertainty continues, bonds could do well.
Sentiment might falter even in the face of stable economic fundamentals, so investors should be prepared to rebalance their portfolios accordingly. And if inflation picks up, as it is universally expected to if Trump’s fiscal policies become a reality, then we recommend focusing on quality, medium-term US corporate debt.
The second theme addresses economic growth, and one of the issues we highlight is the balance between monetary and fiscal policy. Central bank intervention seems to be coming to an end as politicians accept they must bear some of the responsibility for stimulating growth.
Trump tapped into this argument during his campaign by promising to spend $1 trillion on infrastructure… even if fiscal stimulus risks expanding the deficit.
More jobs and increasing wages bode well for consumer discretionaries, and we believe infrastructure investment should boost the industrial and IT sectors.
On the other hand, we anticipate a greater risk of recession in 2017 due to rising debt and inflation.
The third theme we call “the agile investor.” In our view the main asset classes… fixed income, equities and commodities… could exploit trends such as new technologies, alternative energy or expanding populations.
This may present active fund managers with an opportunity to reclaim some ground lost to passive funds over the last few years.
Considering this we suggest holding a mix of active and passive investments and advise investors to keep a portion of assets in cash or cash equivalents to capitalize on opportunities when they arise.
The final theme we see emerging in 2017 is the demographic shift in the workforce as baby boomers retire. According to reports, this will lead to a massive transfer of wealth… an estimated $30 trillion over the next 30 to 40 years.
As money flows from an older to a younger generation, we would expect to see some reallocation away from bonds and into growth assets like stocks. This demand will help support stock prices in the coming years.
But bonds should also have healthy demand as aging populations around the world continue to invest in income-generating assets.
Industries that might do well are housing and consumer discretionary, as inheritances may be spent by younger generations with pent-up demand driven by years of student loan repayments.