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2017 Outlook

While the U.S. Bull Market Wears On, a Continued Resurgence Abroad

We’ve updated all the data below through Q3, and our calls remain largely the same. The elongated U.S. credit and business cycle, currently eight years and counting, will likely continue through the second half of 2017, though the risks are rising. For the first time in nearly a decade, the risks to the global economy are concentrated in the U.S. Growth in much of the rest of the world is stable or accelerating. In Europe, a much-anticipated credit and earnings cycle is underway and most emerging markets are recovering from the 2015-2016 slowdowns and recessions.

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Global Landscape

We’ve examined macroeconomic conditions (PMI), policy guidance (interest rates), and current real yields to help you understand some of the most crucial factors for global investing. Explore selected economic and financial data for countries around the world below.



Regional Views

What risks will tighter U.S. monetary policy pose to the global economy? How do international equities valuations stack up against U.S. stocks? Should credit investors consider adding international exposure, especially to emerging markets?

For answers to all of these questions and more, take a closer look at the investment implications policy and valuations will have on a regional level.

2017 Mid Year Outlook
  • United States

    Countries 1

    Total GDP $18.5T

    Total Population 323M

    For the first time in nearly a decade, the risks to the global economy are centralized in the U.S., not in other major world economies. We expect the cycle to continue, but the risks are rising as the Federal Reserve (Fed) tightens monetary policy.

  • International

    Countries 20

    Total GDP $23.3T

    Total Population 606M

    2017 was said to be a “make-or-break” year for the Eurozone and the common currency. However, investors paying too much attention to European politics may be under-appreciating the sound economic and earnings recovery taking place across the continent.

  • Emerging Markets

    Countries 23

    Total GDP $25T

    Total Population 3.8B

    Emerging Markets (EM) growth continues to exceed expectations since bottoming out in 2016. Led by massive policy support from Chinese policymakers, China’s transition to a service- and consumer-oriented economy has provided a tailwind for EM economies globally.

  • The current macro backdrop—low unemployment, reasonable wage growth, a stable-to-weak U.S. dollar—is providing the Fed the cover it needs to continue raising interest rates. In addition, the Fed will likely be able to successfully navigate the slow and prolonged process of allowing securities on its balance sheet to mature without reinvesting the proceeds.

    Our base case remains that the cycle in the U.S. will persist, but a tighter monetary stance does not present the best environment for risk taking in U.S. assets.

  • After years of monetary policy support for the rocky European economy, the European Central Bank (ECB) is looking to end its programprograme of continued easing. Its quantitative easing programprograme will likely run throughout the rest of 2017, and only in 2018 will the story of the ECB’s tightening begin to unfold. For now, the Eurozone can expect to have continued monetary policy support.

  • Across emerging markets, lower inflation rates are driving continued central bank policy easing, with the notable exceptions of Mexico, South Africa, and China. In China, the biggest risk to the current cycle is tighter monetary policy. Over the longer term, China’s rising debt continues to raise concerns as both the private sector and local governments borrow heavily to finance growth. But in the near-term, market fears may be overstated since the government has the flexibility to respond to any at the local level and within the financial system.

All Cycles End with Inverted Yield Curves, but the U.S. Yield Curve is Steep

Sources: Haver, 4/30/2017. Federal Reserve Bank of New York, Board of Governors of the Federal Reserve. System Open Market Account (SOMA) account as of 5/17/2017.

China’s Economy Is Not Collapsing as Many Feared
  • Deliveries
  • Cell Phone Users
  • Online Shoppers
  • Vehicle Sales

Sources:  China National Bureau of Statistics, Haver, 3/31/17.

  • U.S. stocks have enjoyed a tremendous rally off their 2009 lows. Naturally, valuations have become stretched and U.S. equities appear expensive relative to their long-term average and the global benchmark. While opportunities remain in U.S. equities, investors should be cautious. The risk in U.S. credit markets, given tight spreads and rich valuations, is higher than it is in equities. In our view, investors should continue to maintain exposure to U.S. credit but proceed with some caution.

  • European equities trade well below their U.S. counterparts on a price-to-forward earnings basis, and offer significantly higher dividend yields. Global investors looking to diversify away from overvalued U.S. equities and credit should consider opportunities present in Europe, where much-anticipated earnings and credit cycles are currently underway.

  • Compelling valuation opportunities exist at a time when many emerging economies have stabilized and expanded. That’s a powerful combination for unlocking the potential reward embedded in EM share prices. Also, EM sovereign and corporate bonds offer better value for global fixed-income investors seeking potentially higher total returns, in our view. The bottom line is those who remain underexposed to international and EM assets may need to rethink their allocations.

Fixed Income

Sources:  Equity - Bloomberg, 9/30/2017.  Fixed Income - Barclays, Credit Suisse and JP Morgan as of 9/30/17.

Asset Allocation Views

Equities remain the asset class of choice but investors who remain underexposed to international and emerging market assets may need to rethink their allocations. Further, the risk in the U.S. credit markets, given current valuations, is higher than it is in equities. Investors should continue to maintain exposure to U.S. credit but proceed with caution. Here too, international exposure, particularly in emerging markets, may prove beneficial.

FavoredFavoured Equity Assets
Related Funds
Large Cap
Small Cap
Equity - Large Cap
Why is this favoredfavoured?

Small caps may continue to underperform as investors favorfavour more defensive larger-capitalization companies.

Equity - Growth
Why is this favoredfavoured?

In a world where growth is relatively scarce, investors will pay a premium for growth. Value requires a catalyst (i.e., fiscal stimulus) that we do not believe is imminent.

United States
Equity - International
Why is this favoredfavoured?

Developed market equities outside the U.S. are likely to appear more attractively valued as the earnings cycle in Europe and Japan further materializes.

Emerging Markets
Developed Markets
Equity - Emerging Markets
Why is this favoredfavoured?

Emerging market equities continue to offer the most attractive valuations.

FavoredFavoured Fixed Income Assets
Related Funds
United States
Fixed Income - International
Why is this favoredfavoured?

With valuations extended in U.S. credit markets, emerging market local sovereign bonds and credit offer the most attractive value in fixed income.

Corporate Credit
Fixed Income - Corporate Credit
Why is this favoredfavoured?

With credit spreads tight, the room for price appreciation is limited. For now, U.S. credit should be viewed as an income-generating investment.

Short Duration
Long Duration
Fixed Income - Long Duration
Why is this favoredfavoured?

We favorfavour longer duration assets at this point in the cycle, due to the possibility of continued slower growth expectations and low inflation.

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