Resource Search

In this quarterly edition of the CIO Insights, the analysis is on the economic consequences of government policies, assessment of risk and uncertainty in financial markets, and a focus on generating returns in a low-growth world. There is also a look at renewed confidence in emerging markets, as well as a summary of our economic and market forecasts. While forecasts cannot directly measure risk, they do provide a way of understanding what is possible and what is not—and thus how to position portfolios accordingly.

The October 2016 Market Review outlines the market highlights and gives a summary of current events (such as employment housing updates, geo political events and meetings) and their impact on the markets and asset classes. Highlights include economic growth accelerating at its fastest pace since the 3rd Quarter of 2014, expectations for December Fed rate hike rise to its highest level since Brexit, and the U.S. dollar posting its best month since November 2015, rising to its highest level in eight months. The U.S.

What if Trump trumps Clinton in the U.S. Election? With just a few weeks remaining, the markets have not meaningfully priced in the chance of a Trump presidency. While indeed this is not the base case scenario, the outcome of the election is sufficiently unclear that serious consideration should be given to the potential impact of a Trump victory on the economy and the markets over the short term. And at least over that short term, there are concerns. By contrast, the markets would likely take a Hillary Clinton victory as an extension of the status quo and not react dramatically.

Gross domestic product per capita, a proxy for living standards, has slowed dramatically over the last 15 years. For equity investors, slower economic growth translates into reduced opportunity for revenue growth and increased risk for transitory shocks and market volatility. The biggest risk to the economy is that political leaders will respond to subpar growth in living standards by implementing anti-growth policies, including protectionist measures, higher taxes, restrictions on immigration and tighter government regulation of industry, which would likely slow growth even further.

Increasing data availability and shifting investor focus toward ESG integration has led to rapid innovations in the financial industry as demand grows for impact investing. Research suggests that ESG Tilt strategies can earn competitive returns, with particularly favorable results in emerging and European markets. Meanwhile, ESG Momentum strategies appear to provide the greatest probability of earning excess returns for impact investors by rewarding companies with improving “material” environmental, social and governance factors.

In recent years, investment professionals have identified a more nuanced category of diversification—specifically, gender diversification within workplace leadership. Data shows that leadership diversity tends to provide the same benefits as asset-class diversification: higher returns and lessened risk. Given this research, investors, particularly those committed to ESG investing are allocating funds to companies with strong female leadership.

Lower population growth and productivity growth will weigh on future GDP growth. These lower rates of growth, in turn, bring lower returns to many asset classes, including equities and fixed income. While this circumstance creates challenges for portfolios of any risk level, it is particularly challenging to build a low risk portfolio that generates much positive return after inflation and taxes. Adapting to this new environment may require some changes.