Governments and individuals now have to deliver on the promises that they have made. In other words, the rhetoric of last year has to be translated into policy and investment reality. Investors may also have to get used to a world characterized not only by divergence, but also by a continued threat of disruption. We are living in a complex world but investors should not assume that events are so unpredictable as to be impossible to prepare for. Looking at the economic and political landscape, 10 key investment themes emerge for 2017.
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Looking in the rear view mirror on the global markets—including the resurgence of populism, the Fed’s annual rate migration, and portfolio positioning—another up year is in the books for U.S. equities, with 2016 marking the eighth consecutive calendar year to have a positive total return on the S&P 500 Index. This time around the U.S. large capitalization index posted a resilient 11.95 percent total return with 2.41 percent coming from dividends and 9.5 percent from price appreciation.
President Trump was inaugurated into office last week amid rallies and protests lining the streets that continued into the weekend. In his first few days in office, Trump has already put forth executive orders to freeze new agency regulations, withdraw from the Trans-Pacific Partnership, and renegotiate the North American Free Trade Agreement. These actions will have strong effects on production and trade for the U.S. on a worldwide scale. While the domestic growth forecast may be notably improving, investors are on standby to determine which campaign assurances will become reality.
After a sharp stock market rally that ensued immediately after Trump’s come-from behind victory, financial markets have moderated as the realities of governing in the real world have begun to sink in. Investors were initially enthused by Trump’s plans to cut corporate and personal income taxes, reduce business regulations, implement a $1 trillion infrastructure program, and negotiate trade deals more favorable to the United States. While supportive of the ideas, Republicans are wondering how all of this will be paid for.
Drive anywhere outside of a major metropolitan area, and you will find roads and bridges in need of serious repair. Talk to business owners, and they will tell you how the difficulty of moving goods from where they are produced to where they are sold hurts their margins. It is time to improve the aging infrastructure of the United States. Regardless of how policymakers decide to finance such a project, the multi-year infrastructure investment will boost economic growth, create jobs and provide a significant opportunity for middle market businesses.
The combination of improving economic data, stronger corporate earnings, and, particularly, potential policies from the Trump administration has created a heady brew for domestic equity markets. Even stocks abroad are posting robust returns. While President Trump’s plans for infrastructure spending, tax cuts, deregulation, and generally growth-focused policies are a key factor in the current U.S. stock rally, these policies are also a main source of uncertainty, and therefore risk, for investors.
Political events in 2016 gave rise to increasing nationalism and populism globally. Combined with a global slowdown in economic and trade growth, international integration may already have plateaued and could begin to reverse over the coming decade. Multinational organizations should prepare for potentially significant implications by carefully considering the political threats in the countries in which they operate.
The potential economic and development gains from gender equality are vast and well-documented—and yet they are currently being bypassed. This joint report with the United Nations Foundation explores the market potential of advancing gender equality. By investing in companies offering products and services that promote gender equality, investors can earn the “return on equality,” seizing profitable, under-tapped market opportunities. In fact, narrowing the global gender gap could add U.S. $12 trillion in annual gross domestic product.
Taking a closer look at the major market themes and strategic positioning for 2017, the view is slightly more optimistic than 2016, but includes many of the same themes that played out last year. Although there may only be a modest pickup in economic activity, equity markets should benefit from expectations of growth and strong corporate earnings. Given this backdrop, expect modest equity returns with developed economies outpacing emerging markets, interest rates to move modestly higher across the maturity curve, and bouts of volatility.
Anyone comparing diversified portfolio returns to domestic equity performance since the election may be disappointed, but this initial discouragement is misplaced. Instead, investors should remember the value of diversification and have confidence when positioning portfolios for the long term instead of reacting to current headlines. By taking this approach and holding onto recommended asset classes, investors can keep their eyes on the real prize of achieving their long-term wealth goals.