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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1. The G10 is made up of 11 industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States).
For C&I lending standards we refer to the question on standards for commercial and industrial (C&I) loans to large and mid-size firms, reported in the Fed’s Senior Loan Officer Survey.
The S&P 500 Index is a free float-adjusted capitalization-weighted index of the prices of 500 large-cap common stocks actively traded in the United States.
The MSCI AC World ex-U.S. Index is designed to measure the equity market performance of developed and emerging markets and excludes the U.S.
The MSCI AC World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The MSCI Emerging Markets Index is designed to measure the equity market performance of emerging markets.
The Citigroup US High-Yield Market Index (HYM) is a U.S. dollar-denominated index which measures the performance of high-yield debt issued by corporations domiciled in the U.S. or Canada.
The Citigroup US Broad Investment-Grade Bond Index (USBIG) tracks the performance of U.S. dollar-denominated bonds issued in the U.S. investment-grade bond market.
The Citigroup US Government Bond 7-10 Year Index (U.S. GBI) measures the performance of fixed-rate, local currency, investment-grade sovereign U.S. bonds.
The Citigroup U.S. 90 Day T-Bill Index is an unmanaged index representative of three-month Treasury bills.
The JPMorgan Emerging Markets Bond Index Global Diversified is a composite index representing an unleveraged investment in emerging market bonds that is broadly based across the spectrum of emerging market bonds and includes reinvestment of income (to represent real assets).
Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall.
Equities are subject to market risk and volatility; they may gain or lose value. Emerging and developing market investments may be especially volatile. Commodity-linked investments are speculative and have substantial risks, including the loss of principal.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.