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Pinebridge assesses opportunities and risks for investors in 2017

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PineBridge Investments has released its 2017 Global Investment Outlook, an analysis and preview across asset classes of the opportunities and risks for investors in the year ahead.

“We surveyed the state of the markets on behalf of multi-asset, fixed income, and equity investors around the world. What we found is that all of these markets are ripe for change – and the catalysts are everywhere,” says Greg Ehret, CEO of PineBridge. “Political winds are shifting across developed and emerging economies and globalization shifts are creating new challenges and opportunities. Investors will have to look within and across geographies, sectors, and asset classes to best position themselves for this new chapter. ”
 
According to Pinebridge, in 2017 investors will need to keep an eye on the rise of political risk in the developed world, particularly in the US and Europe, which could depress growth and raise market volatility.
 
Markus Schomer, chief economist, is looking for a move in monetary policy away from excessive stimulus in the developed world and toward a more balanced stance that will gradually turn into policy normalisation in the next few years.
 
“There should also be a gradual shift toward growing business investment – as long as interest rates remain low – instead of labour expenditures. Overall, the team expects a moderate re-acceleration in global economic growth from the 3 per cent average in the past two years to 3.4 per cent in 2017 and 3.7 per cent in 2018,” says Schomer.
 
For US GDP, growth forecasts have been raised to 2.7 per cent in 2017 and 2.9 per cent in 2018.
  
“The year ahead marks several simultaneous secular turning points including the initial signs of deleveraging ending in the US. A net plus to global growth with more meaningful differences to regional, sector, asset class, and factor winners and losers is a healthy backdrop for seeking alpha from choosing beta,” says Michael J Kelly, global head of multi-asset. “When the two largest economies – the US and China – pivot from slowing to revving up, take notice. Several other simultaneous regime changes are also likely to be fellow travellers.”
 
While the US equity market previously appeared modestly overvalued, after-tax cash flows will now be worth more if taxes are meaningfully reduced. US GDP should also accelerate from a host of factors. Given US small-cap and value stocks’ economic sensitivity, their attractive valuation is now being complemented with improving fundamentals by the second half of 2017, when tax rates should decline.
 
Countries with accelerating and domestically sourced growth – like India and Indonesia – provide compelling opportunities. Commodity producers should be big winners with infrastructure programs working their way through the pipeline. Risks to the outlook include trade negotiations spiralling into a global trade war, an inflation scare (but not an actual spike) emanating from the US, sluggishness in Europe and Japan, where negative interest rates and commensurately low output gaps persist, and China rethinking its faster trajectory.
 
In 2017, PineBridge expects fixed income returns to decline while tail risks increase. More caution is in order given the likelihood of volatility flashpoints related to rising political risk in developed countries as well as a limited valuation cushion to absorb market shocks.
 
“With political risk and a transitory environment of monetary and fiscal policy we can expect heightened bouts of volatility to impact investing in fixed income. Investors must capture incremental alpha opportunities both across and within asset classes through micro views and security selection,” says Steven Oh, global head of credit and fixed income.
 
Across developed markets investment grade, US dollar credit is preferred over European credit with Treasury Inflation-Protected Securities (TIPS) as a defensive portfolio hedge, given higher US inflation risk. In leveraged finance, loans are favoured over high-yield bonds on a risk-adjusted basis, with the US more attractive than Europe. In emerging markets, hard currency investment grade bonds over high yield segments are recommended for 2017, along with a targeted approach toward local currencies.
  
The period of sharply falling earnings estimates for 2017 appears to have ended, with an increase in the number of companies seeing positive revisions, which should restore investors’ confidence in the broad equity market. The slump in emerging markets may be ending as many of the main factors that led to underperformance are now stabilising or even reversing, and infrastructure spending ramps up in Asia. However, risks to equity markets remain with the uncertainty around US trade agreements or a potential disorderly increase in bond yields. 
 
“We see equity flows pivoting to active strategies in a market driven by fundamentals where selectivity will be key, as global growth accelerates,” says Anik Sen, global head of equities. “We maintain a high conviction on technology-related investments, small and midcap stocks, the US regional banks as well as in industries that benefit from infrastructure spending. In emerging markets, China is a bright spot with attractive secular growth in a number of sectors, and our positive view on India and Brazil, in particular, remains unchanged.”

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