The Long Cycle Continues
We expect the long post-crisis economic recovery to continue in 2017. As a base case, we think growth is poised to broaden out to more countries, with the global economy drawing on more sources of strength than at any point since 2010.
From an investment perspective, our base case view is broadly supportive for risk assets. We prefer equities over credit and credit over rates, but we expect low returns from these traditional exposures given 1) elevated valuations, 2) limited upside for corporate earnings from current levels and 3) limits to economic growth potential.
Broadening exposure beyond conventional stocks and bonds, identifying opportunities in emerging markets and deploying more dynamic asset allocation strategies are some ways to adapt.
In some respects, our outlook represents an extension of the same long cycle we envisioned heading into 2016.
The key difference for 2017 revolves around four emerging transitions. Populism is challenging globalism and creating new tail risks. Concerns about low growth are giving way
to concerns about inflation. Years of focus on monetary policy are giving way to a close watch over fiscal policy.
And concerns about new regulation are acceding to hopes for de-regulation.
Transition will be an evolving theme in 2017, and we will be re-visiting it in our publications throughout the year. In this Investment Outlook, we highlight specific signposts we will be watching, both to gauge the pace of transition and to test our base case view on the key investment questions.