2017 Look Ahead: Cautious Optimism

January 6, 2017 Ian Taylor

Blog image

By Ian Taylor, CFA
Portfolio Manager

At various gatherings this past holiday season, I loved answering one question (“Do you know if you’re having a boy or girl?”) and tried to avoid the other (“What stock should I buy?”).

Thanks to my job as a portfolio manager, my friends and family seem to think I’ve got a crystal ball and can tell them which stocks will turn them into millionaires. I always disappoint and ask if they’ve got a financial plan in place.

That said, my job does require me to look ahead and decide how to position our clients’ portfolios to best capitalize on the business cycle and market conditions. And as 2017 comes into focus, I’m seeing reasons to be cautiously optimistic.

Why 2016 was a strong year

Throughout 2015, central banks around the world had maintained their low interest rates. A drop in commodity prices, particularly oil, had also kept the inflation rate low. Because of all this—and despite a rocky start—we saw the global economy strengthening in 2016.

Given these factors, an upturn in the business cycle was expected. We saw broad-based gains in the global economy, primarily in the U.S., Eurozone and Emerging Markets, with the Global Purchasing Managers’ Index reaching its highest level for the year in December.

We were overweight equities for most of the fourth quarter, capitalizing on those gains.

What we might see in 2017

Going into 2017, we are more cautious and have moved toward a neutral weighting. The potential for market gains remain but the risks for losses are clear. 

The supporting factors that were present in 2015 may be receding. With the U.S. Federal Reserve raising rates and with significantly higher commodity prices in 2016, the combination of higher interest rates and higher inflation could start curtailing growth. 

This makes it extremely important that portfolios are invested in companies that can grow and gain market share in a challenging environment.

The Eurozone remains a potential source of volatility with elections scheduled in Germany and France, as well as Brexit negotiations. In the U.S., markets have been quite optimistic following the Trump election though there remains a great deal of uncertainty about his policy. China continues to work towards rebalancing its economy and we expect there will be bumps in the road.

Why we’re cautiously optimistic

Any of the above could lead to short-term spikes in volatility.

As always, we’ll stick to our well-defined investment philosophy and process. By being selective about which regions we invest in, and also by looking at the top-down factors driving the global economy and markets, we can better position client portfolios through tactical asset allocation, capturing the upside and protecting on the downside.

This year, we could see positive surprises from fiscal policy makers as they make key decisions on government spending and taxation, which would be supportive for markets.

However, if the global business cycle, and in particular, the U.S. business cycle, were to experience a slowdown, I would expect markets to react poorly. As a result, I think a neutral stance makes the most sense entering 2017.

For investors, it’s paramount that they have a well-defined strategy, and if they follow it, I’m confident that the results will be there.

On a personal note, I am very optimistic on 2017 as my wife and I welcome our second child in May. Despite all the headlines in the news, it’s a reminder to me that businesses and society in general continue to be quite productive!


About the Author

Ian Taylor

Ian Taylor, CFA, is an Assistant Vice President with the Investment Management and Strategy team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.

More Content by Ian Taylor
Previous Article
Watching Other People Play Video Games: Yup, It’s A Sport
Watching Other People Play Video Games: Yup, It’s A Sport

When I was a kid playing video games for hours on end, I tried convincing my (disapproving) parents that it...

Next Article
Turn Your Head and Cough: Our Annual Fund Advisor Check Up
Turn Your Head and Cough: Our Annual Fund Advisor Check Up

Over the last few months, my portfolio manager team members and I have hit the road, travelling through Can...


Subscribe to our Newsletter

I allow MD Financial Management (including MD Financial Management Inc., MD Management Limited, MD Private Trust Company MD Life Insurance Company and MD Insurance Agency Limited), the Bank of Nova Scotia and other members of the Scotiabank group of companies (“Scotiabank Members”) to send me electronic messages (such as emails and SMS text) about their products and services, offers, events, and other valuable information as well as information about the products and services of other Scotiabank trusted partners that may be of interest to me.  This consent is being sought on behalf of each MD Financial Management and Scotiabank Member which includes any company(ies) or person(s) that form a part of the Scotiabank group of companies in the future. View the MD Privacy Policy here.
Thank you!
Error - something went wrong!