March 8, 2017
The global economy is growing. Manufacturing is expanding in most developed markets and in China. GDP growth is slightly to modestly positive in most major economies, and global inflation is approaching more healthy levels.
The primary risks to that growth continue to be geopolitical (to which we assign a low to modest probability of occurring) and unrealistic expectations about implementing President Trump’s agenda (to which we assign a much higher level of probability).
On the investment side we maintain our general market forecasts:
- Nothing looks cheap to us, at least at the index level.
- Equity valuations look increasingly stretched to us as prices rip upward and increasingly outpace earnings and GDP growth. We will not be surprised by a market correction in the first half of the year, especially if investor sentiment turns less ebullient as the Trump agenda (inevitably) slows down. But we remain modestly constructive for the year, with the US and EM outperforming EAFE again (though we expect relative improvement in EAFE performance).
- Increased volatility and security performance dispersion should mean a better year for active and alternative managers.
- We believe there is significant price risk in public fixed income — maybe a little more play in high yield because of its embedded duration hedge, but there is not too much to be excited about.
- We think there are better opportunities in the private equity and private credit spaces for investors who can access them and can handle the illiquidity.
- 2017 should be a better year for alternative investments, but we are more optimistic about hedge funds than liquid alternatives because of the liquidity and leverage constraints associated with mutual funds.
- We remain constructive about real assets and the commodity complex, especially if global growth continues to pick up.
- In the face of policy uncertainty and expensive markets, we continue to strongly recommend globally diversified portfolios and a firm handle on portfolio liquidity.
- The screaming equity market is not allowing for any obvious “entry points” at this time — “buying the dip” doesn’t work when there is no dip. But there will be.
- Where appropriate, advisors and investors should consider rebalancing more frequently, taking gains off the table and reallocating back to the policy portfolio.