2017 Outlook
implementation guide

Global growth, policy and markets appear to be at an inflection point. We expect U.S. - led reflation—rising nominal growth, wages and inflation—to accelerate. The pick-up in growth is global; the reflationary trend shows signs of taking root in emerging markets, with a rebound in economic activity and prices.

We see fiscal expansion gradually replacing monetary policy as a growth and market driver around the world. U.S. President Donald Trump has pledged to slash taxes and boost infrastructure spending. His fiscal plans could deliver a boost to U.S. growth, yet the magnitude and potential side effects are uncertain. Corporate tax cuts could be offset with measures such as eliminating the deductibility of paid interest—a game changer for equity and credit markets.

Still, subdued economic growth and still low rates take a toll on prospective asset returns.

Key themes

Reflation implications: We see reflation taking root and believe global bond yields have bottomed. As a result, we prefer equities over fixed income and credit over government bonds. We see higher yields and steeper curves, and favor short- over long-duration bonds and value shares over bond-like equities.

Low returns ahead: Structural factors such as aging societies and weak productivity growth have driven a drop in potential economic growth. We believe these factors limit how high real yields can go and see rewards for taking risk in equities, emerging market (EM) assets and alternatives in private markets.

Dispersion: We see the gap between equity winners and losers widening. A more unstable relationship between bonds and equities signals a regime change that challenges traditional diversification.

Risks: Political and policy risks abound including uncertainty about President Trump’s agenda, French and German votes testing Europe’s cohesion, and China’s capital outflows and yuan pressure. The European Central Bank (ECB) may start to cut bond purchases at some point.

Markets: We see developed market equities moving higher in 2017 and prefer dividend growers, financials, health care and Japan. We like emerging market equities but see potential trade tensions as a risk. In fixed income, we favor high-quality credit and inflation-linked securities over nominal bonds.