A high degree of economic and political uncertainty made 2016 a challenging year for global investors. In order to navigate this new market environment, it is important to fully account for the macro events of the past twelve months, while attempting to understand the implications for the year ahead.
2016 | The Year in Review
During the first half of 2016, concern about the pace of global growth and ongoing, aggressive monetary stimulus resulted in market instability and a flight to “safe” or bond-like equities such as utilities and REITS (Real Estate Investment Trusts). Although global markets found a bottom in February, as oil, and commodity prices in general, began to rebound, this was soon overshadowed by the surprising result of the Brexit vote and then later-on, the stunning electoral victory of now President-elect, Donald Trump.
Going into the last two quarters of the year, general market pessimism had given way to guarded optimism as outlooks and attitudes began to change, and gradual, yet undeniable, improvements in economic indicators began to be priced into global markets. The most significant of these market-moving indicators were:
- The ongoing recovery in the U.S. economy, with employment and housing data remaining robust;
- Monetary easing seemingly having a positive impact in Europe; and
- Stimulatory policies in China clearly contributing to a recovery in commodity and energy prices.
2017 | The Year Ahead
The global upswing looks set to run into 2017 as ongoing economic improvement is bolstered by proactive fiscal policies and accommodative monetary policy. The three key unknowns going into 2017, all of which will have an impact on global markets, are:
- The first hundred days for the new U.S. President
- Key elections in France, Germany and the Netherlands
- Shifts from monetary to fiscal policies in the U.S. and Europe
Donald Trump won the U.S. Presidential election on a platform of “America first” which could have significant global ramifications. Currently, President-elect Trump’s policy proposals lack detail, and unfortunately, clarity will only emerge in the coming months as he assembles his cabinet and establishes his relationship with the Republican-controlled Congress. Trump’s policy proposals of higher tariffs on trade, curbing illegal immigration, increased federal stimulus and tax cuts for corporations and the wealthy, are likely to provide a quick short-term boost to the U.S. economy. How these policies will influence the global economy could range from moderate to severe depending on whether Congress can rein in Trump’s campaign rhetoric.
The Eurozone’s growth should be moderate, as supportive monetary policy, an improving labor market and a less austere fiscal stances fuel economic momentum. However, there will continue to be heightened political risks in the bloc as the rising support for populist parties in 2016 in the UK and Italian referendums is projected onto key Presidential and lower house elections in France, Germany and the Netherlands. A possible victory for populist parties such as the pro-Frexit National Front in France would represent a major disruption for Eurozone financial markets. Victory for the establishment parties in these countries will provide a more stable political atmosphere, but any misstep could roil financial markets, not just in Europe, but on a more global level.
On the interest rate front, it is anticipated that the U.S. Federal Reserve will likely pursue a somewhat dovish tightening cycle during 2017, potentially raising rates once if not twice. Outside of the U.S., additional monetary stimulus will possibly be implemented as the European Central Bank and Bank of Japan seek to build on the quantitative easing implemented in 2016.
Investment Approach for 2017
Be Selective. Be Nimble. Be Ready for Change.
Excel Investment Counsel Inc. believes that there are always opportunities to be found in global financial markets, regardless of uncertainties, and as active managers this is our job and value-add to investors.
With reflationary policies expected to take hold in the U.S. and Eurozone, we are positioned to benefit from this change in the financial landscape by increasing our exposure to commodity producers as well as exporters earning U.S. dollars. Our conviction in this idea is largely driven by the strong U.S. dollar trade, fiscal spending on infrastructure by major economies, and the recently announced OPEC oil deal, which is expected to create a nominal floor of around $50/barrel for crude.
While question marks remain on how much the U.S. economy will expand as a result of Trump’s policies, we maintain that a world in which U.S. growth is strong, is a positive environment for global markets, including developing economies. The primary differentiator with the emerging markets is that they offer diversification away from traditional asset classes (think U.S. and Canadian securities), with the potential for greater growth or capital appreciation on the equity side. Specifically, we will look to target growth that is insulated from macro shocks. India is a prime example, where domestic consumption is a tailwind for economic growth as well as equities -- we are maintaining our overweight position in India going into 2017.
On the fixed-income end of the spectrum, investors that target the emerging markets are also diversified across approximately 60 different countries and interest rate cycles, and can invest in hard currency as well as local currency bonds, with the scope to generate far greater yields compared to U.S. and Canadian Treasuries. Having a more dynamic approach is key to generating alpha in this space.
Our fixed-income portfolio management team continues to see value in hard currency bonds and has a preference for higher carry sovereign debt, particularly in a new global environment of rising U.S. interest rates. The team is also constructive on Latin America, where sweeping pro-business reforms are underway in countries such as Brazil and Argentina. The room to cut interest rates in Brazil, especially, makes both hard and local currency Brazilian bonds very attractive. We are less constructive on emerging market forex, as our outlook for the U.S. dollar is very strong versus a basket of emerging market currencies.
Global emerging markets cannot be painted with a single brush, and we believe this will prove even more so to be the case in 2017. Having outlined the major events to watch this coming year, we plan to be as diligent and rigorous in our research as ever before, while placing more emphasis on being agile and ready to adjust or reposition as pieces of each of these events begin to come into focus.
This document may make forward-looking statements and there are risks that actual results could differ materially from forecasts, projections or conclusions in the forward-looking statements. Certain material factors and assumptions were applied in drawing the conclusions or making the forecasts or projections in the forward-looking statements and you may find additional information about such material factors and assumptions and the material factors that could cause actual results to so differ from the sources provided.
The content in this document is for informational and illustrative purposes only and is not intended to provide specific financial, investment, or other advice to you, and should not be acted or relied upon in that regard without seeking the advice of a professional. Particular investment or trading strategies should be evaluated relative to each individual.