Protectionism, Monetary Policy Shifts and a Focus on Fiscal
Policy to Impact Well-Established Investment Beliefs
State Street Global Advisors (SSGA), the asset management
business of State Street Corporation (NYSE: STT), today released
its global market outlook and key investment themes for 2017. In
the report, SSGA points to 2017 being another year with top-down
global, political and policy developments that will have an
outsized impact on investment returns.
“Seismic geopolitical events, most notably the Trump presidency
and Brexit surprises, marked 2016 as a game-changer across the
geopolitical landscape, with significant implications for economies
and markets alike,” said Rick Lacaille, global chief investment
officer for SSGA. “Populist politics and anti-globalization
sentiment have set the stage for significant policy change in 2017
and beyond. In our view, some of the leading themes that have
served investors well over the past several years are shifting in
the face of a changing investment backdrop. Investors will need to
consider areas of the market that will benefit or suffer from a
possible reflationary environment, altering, for example, the
search for yield.”
A Focus on Fiscal Policy
“With many central banks now short of policy ammunition,
reluctance to employ fiscal stimulus has finally waned,” said Chris
Probyn, chief economist at SSGA. “Austerity is less pronounced in
continental Europe. The UK is delaying its planned return to budget
surplus following the EU referendum result. Canada and Japan are
introducing stimulus packages. China is using targeted fiscal
measures to help cushion growth and transition to a more
consumer-driven economy. And President-elect Trump's proposals for
tax cuts and additional infrastructure spending could potentially
boost US growth to near 3.0% over the near term.”
“Similarly, the International Monetary Fund has endorsed
increased government spending, recently stating that fiscal support
‘remains essential for generating momentum and avoiding a lasting
downshift in medium-term inflation expectations,’” continued
Probyn. “Investors, however, must decide how much faith they should
put in the government’s purse and what areas of the market it’s
likely to impact.”
Elections to Watch
“The potential for further political tumult to impact markets in
2017 abounds,” said Lori Heinel, deputy global chief investment
officer at SSGA.
“Major elections in Europe will intensify concerns of further
destabilization of the euro — most notably in France where the
Eurosceptic National Front Party has grown in popularity. There
remains a very strong incentive for EU officials to do whatever it
takes to maintain the monetary union. It only takes the idea of
instability to incite fear among investors and this sensitivity
could drive euro weakness during the first half of 2017,” continued
Heinel. “While there is still a great deal of uncertainty around
final effects, we can already see that some of these changes will
likely hasten shifts that are already underway.”
“With monetary policy perhaps at its limits to stimulate growth,
a turn towards fiscal stimulus (which will also serve to appease
social discontent in some countries) is likely in 2017,” added
Heinel. "But political tensions could limit the scope and
effectiveness, and the knock on effects could lead to more
volatility and more differentiation between market winners and
losers.”
Protectionism on the Rise
Proposed global trading agreements are losing support across all
markets and the incoming US presidential administration opposes the
12-nation Trans Pacific Partnership. Moreover, the number of
protectionist trade measures imposed globally in 2016 is five times
as many as through the same period last year. “A broad reversal in
global trade is almost certainly a negative for global growth and
is consistent with our modest return forecasts for global
equities,” said Dan Farley, chief investment officer for SSGA’s
Investment Solutions Group. “Within certain local industries,
however, protection will be beneficial as firms become more
competitive domestically, just as it will be a drag on companies
with substantial global exposure.”
Policy Shift: A Game Changer for Investors?
After years of unconventional monetary policy to combat
stubbornly low growth and inflation, the US is cautiously
proceeding with rate normalization, while central banks in Europe
and Japan have shown some hesitation to extend negative interest
rates and asset purchase programs.
“With monetary policy perhaps at its limits to stimulate growth,
a turn towards fiscal stimulus (which will also serve to appease
social discontent in some countries) is likely in 2017,” said
Heinel. “This begs the question: what additional tools, if any, are
available to global central bankers if what has already been tried
no longer works?”
Translating rhetoric into action around fiscal expansion and
infrastructure spending could spawn a virtuous cycle of increased
spending, rising confidence, and perhaps re-ignition of the US as
the global economic engine. At the same time, faster inflation and
rising interest rates will put pressure on bonds.
Summary of SSGA’s Near-Term Portfolio Strategy
In the quest for equity growth, SSGA believes investors should
be particularly thoughtful about which sectors they choose, as
certain areas of the market have been bid up to uncomfortably high
valuations. Some investors may need to diversify to allocations
that could benefit from a rising rate environment. For those
seeking yield, the evolving profile of bond and equity markets will
demand a more nuanced and cautious approach. Meanwhile, patterns of
volatility suggest heightened risks for equity markets in 2017, and
the Federal Reserve’s capacity to temper extremes appears
increasingly stretched. As such, investors should revisit their
volatility management and currency hedging strategies. Tail risk
hedging, dynamic or tactical overlays that deliver alpha or reduce
risk, or other diversifiers can help to prepare for the uncertain
environment ahead.
Equities
- After five consecutive quarters of
negative earnings growth for the S&P 500, it turned positive in
the third quarter of 2016 and we expect it to remain positive in
Q4
- We anticipate that Fed interest rate
increases should be a boon for financials, boosting interest
margins, but may limit sectors such as consumer discretionary that
have benefited from an easier borrowing environment
- The one-year forecast for equities in
developed markets (ex-US) is comparable to our 3.3% US forecast,
therefore we urge investors to tread with caution toward
international equities with underweight positions in developed
European and Asia-Pacific regions
- Our forecast for emerging market
equities is six percent for 2017 on a stronger growth outlook as
Russia and Brazil emerge from recession and as the negative impact
of falling commodity prices has abated
Government Bonds
- We believe fear-record low yields
provide a poor starting point from which to invest in global fixed
income markets and without price appreciation from even lower
yields, this group of securities can only provide negative
returns
- For US 10-year bonds, we forecast a
one-year return of 0.3%, and a negative 0.3% return for developed
market government bonds outside the US
Credit and High Yield
- In our view, the US credit and high
yield debt seems favorable with one-year forecasts of two percent
and 5.1%, respectively
Commodities
- Our research indicates that while oil
has made an impressive comeback since the early-2016 lows, a
continued supply glut and modest global growth will probably keep
energy range-bound with a slight upward bias in 2017
- We predict that precious metals, such
as gold, should continue to do well in an environment with
widespread negative global interest rates and a gradual return to
higher levels of inflation
“Ultimately, we see 2017 as a year that will continue to be
punctuated by significant, and at times unpredictable, political
and economic change,” said Lacaille. “Overall investors will need
to consider how best to position their portfolios for the
opportunities and risks these changes bring.”
About State Street Global Advisors
For nearly four decades, State Street Global Advisors has been
committed to helping financial professionals and those who rely on
them achieve their investment objectives. We partner with
institutions and financial professionals to help them reach their
goals through a rigorous, research-driven process spanning both
active and index disciplines. We take pride in working closely with
our clients to develop precise investment strategies, including our
pioneering family of SPDR ETFs. With trillions* in assets under
management, our scale and global footprint provide unrivaled access
to markets and asset classes, and allow us to deliver expert
insights and investment solutions.
State Street Global Advisors is the investment management arm of
State Street Corporation.
*Assets under management were $2.4 trillion as of September 30,
2016. AUM reflects approx. $40 billion (as of 9/30/2016) with
respect to which State Street Global Markets, LLC (SSGM) serves as
marketing agent; SSGM and State Street Global Advisors are
affiliated.
Important Information- Marketing Communication
Investing involves risk, including the risk of loss of
principal.This document may contain certain statements deemed to be
forward-looking statements. All statements, other than historical
facts, contained within this document that address activities,
events or developments that SSGA expects, believes or anticipates
will or may occur in the future are forward-looking statements.
These statements are based on certain assumptions and analyses made
by SSGA in light of its experience and perception of historical
trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances, many of
which are detailed herein. Such statements are subject to a number
of assumptions, risks, uncertainties, many of which are beyond
SSGA’s control. Please note that any such statements are not
guarantees of any future performance and that actual results or
developments may differ materially from those projected in the
forward-looking statements.The information provided does not
constitute investment advice and it should not be relied on as
such. It should not be considered a solicitation to buy or an offer
to sell a security. It does not take into account any investor's
particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial
advisor. All material has been obtained from sources believed to be
reliable. There is no representation or warranty as to the accuracy
of the information and State Street shall have no liability for
decisions based on such information.
CORP-2455Exp. Date: 12/31/17
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State Street CorporationAndrew Hopkins, +1
617-664-2422Ahopkins2@StateStreet.com
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