Bark versus bite: our key investment themes for 2017

  • Written by 
  • 14/12/2016

The alleged popular backlash against globalisation has shown a bark worse than its bite so far. Highly evolved constitutional defences have helped, as has an increasingly robust business cycle. Of course, there may be more of a ‘bite’ to come in the year ahead, as Article 50 is finally invoked in the UK, President Trump gets his feet under the Oval Office desk and European voters get a few more chances to illustrate their discontent.

Investment theme #1 - Leading indicators: no end i ...3 of 10 Welcome 1 of 10

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

5 Key Takeaways

  • Our five preferred indicators continue to point to the economic cycle having further to run – stocks to continue to outperform bonds
  • Politics to continue to offer more bark than bite for capital markets investors – European equities to outperform, but nervous European equity investors should retain unhedged exposure to US companies
  • Emerging Markets Equities to outperform in spite of protectionist noises emanating from the developed world
  • For equity sector strategy, focus on areas most likely to benefit from underestimated prospects for growth and inflation – banks, industrials and technology
  • A diversified portfolio will still be your best defence against unforeseen equity downdrafts

However, our view remains that much like this year; politics will create plenty of lurid headlines, but it will be the underlying fundamentals of the economy that matter most for investments. The influence of the political backdrop on those fundamentals will likely remain hotly debated, but marginal in most cases.

We remain wary of this anti-globalisation/end-of-liberal consensus theme that is attracting so much comment at the moment. The world tends to be messier than the commentators trying to impose such epic all-explaining themes on our ever-changing times will allow for. Some have already pointed out that the average income of President-elect Trump supporters actually sits above those who supported Hillary Clinton1. Meanwhile, the strongest predictors of voter behaviour in both the UK’s referendum on its EU membership and the US presidential election have not been income, but education level, ethnicity and age2. In our opinion, the liberal economic world order is likely too well-established to meaningfully reverse in the next few years. Economic self-interest and constitutional safeguards will likely keep the world economy on the well-trodden path that has coincided with decisively less global inter-country inequality, poverty and violence over the last half-century (Figures 1 and 2). This does not mean that we do not take some of the political promises to unravel these regimes seriously. Quite the reverse – if we did see protectionism raise its ugly head again, there would likely need to be material changes to our recommended asset allocation as we incorporated a dramatically increased probability of an imminent US and global recession.

For the moment, we remain focused on the prospects for global economic growth and inflation as the primary inputs into our investment thinking. On the indicators that we look at, the next global recession does not yet look imminent. For the moment, our five preferred indicators (explored in further detail in one of the short essays below) continue to point to global economic growth remaining above stall speed and inflation bouncing back. With regards to the latter, it now seems a little more plausible to imagine inflation loitering above-trend in the US and UK, with wages and import prices now among the indicators suggesting as much. If President-elect Trump gets to enact his full stated agenda, then inflation forecasts will likely have to rise substantially again. As discussed in In Focus – Trick or Treat?, we choose to withhold judgement for now, and focus primarily on the economic forces already in motion.

All in all, the world looks like it will continue to reward portfolios slanted towards equities at the expense of bonds. There will come a time to change that stance, but that moment does not look imminent to us yet. In the short essays that follow, we explore some of the things to think about for the year ahead. The list is neither definitive nor exhaustive, but should help illustrate some of the thinking behind our current tactical asset allocation.

1 Explaining nationalist political views: The case of Donald Trump – Rothwell, Gallup, September 2016
2 It’s NOT the economy, stupid: Brexit as a story of personal values – Kaufmann, July 2016