By Ian Taylor, CFA
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!