An Asset Allocator’s Guide to 2017

Markets seesawed through much of 2016 and, by the eve of the U.S. Presidential election, the S&P 500 Index was up barely 5% for the year, while global markets were up even less. Following the U.S. Presidential election, however, equities moved sharply higher, with the S&P closing out the year up almost 12% while Treasury yields rose above 2.5%.

Will 2017 continue to favor risk assets or will the combination of higher rates and richer valuations help end the cycle? In formulating our 2017 outlook, we asked ourselves three key questions: Does the macroeconomic backdrop support risk-taking? What is the nature and level of risk across assets? And finally, are investors well-compensated today for taking risk?

Perspectives on Macro, Risk and Valuations

From a macro regime perspective, we note that a generally positive—if modest—global growth environment should favor equities and credits over government bonds. Our risk team makes the case for the recent rise in interest rate volatility to spread to other assets. Finally, our quant team explores valuations from a total-return perspective across asset classes and a relative-value perspective across risk premia.

Current Portfolio Positioning

Our overarching view is that, while 2017 brings unique challenges, cyclical factors could drive relatively expensive assets such as U.S. equities and the dollar higher in the near term. Our current positioning is as follows:

  • Overweight the U.S. dollar versus other developed market currencies.
  • Slightly overweight equities, particularly in emerging markets and the United States.
  • Long emerging market currencies and bonds.
  • A significant allocation to low-duration income assets, particularly loans and catastrophe bonds.
  • Underweight duration in developed market government bonds.

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