ISAG Roundtable: Investment perspectives for 2017

If 2016 was an unlikely year (Brexit, D. Trump), 2017 will be a year of uncertainty.

The cause of this uncertainty is threefold: politics in Europe (elections in France, the Netherlands, Germany, further discussion on the implementation of Brexit), monetary with the dollar and the Fed and finally economic, in particular the extension of the US business cycle.
Political risk becomes a structural element in the conduct of investment policies. A reform-based change in power in France would be a positive surprise, but the risks remain high in Italy, Spain, as well as the Netherlands.
Regarding the monetary policy of the Fed, the ISAG consensus is relatively cautious, with an expected cumulative tightening of 25bp to 75bp. This moderation is based on an uncertain reading of US economic cycle. The US economy is in the final phase of the cycle and the fiscal stimulus measures proposed by D. Trump will occur in a full employment regime, limiting their impact on economic growth and promoting inflation. Instead of lengthening it, the Trump measures would have the opposite effect, namely to shorten the cycle. The Fed could then come into conflict with the fiscal stimulus policy. For this reason, 40% of the members of ISAG consider that there is a possible risk of recession in the US within 12 months. The dollar also raises questions. Additional appreciation would weaken the United States (cyclical downturn, reversal of the improvement in profitability) and would increase the vulnerability of emerging markets.
Faced with these questions, ISAG’s strategists agree on several points in the macroeconomic financial guidelines. First, the valuations of financial assets are stretched in all asset classes. Secondly, monetary policy divergences will continue. Finally, the economic cycle is relatively mature. The result is an asset allocation that maintains an equity (42%) and credit (24%) bias, with a slightly overweight slider. The weight of the alternative remains high at 12%, while cash is at 6% and raw materials at 4%. With regard to State bonds, the weight is limited to 12%, but many CIOs have said they are ready to retake exposure to US rates after the correction of 2016. This opportunistic increase in the duration would be at the expense of bonds of companies and shares, which could lose their bullish momentum quickly in the case of disappointing profits and growth. In relative terms, pessimism is more pronounced on German rates, which could become tight if the ECB announces a possible tapering for 2018 in the middle of this year.
If the asset allocation choices are less clear, which makes sense after 8 consecutive years of increases in the S&P 500, the ISAG consensus shows clearer convictions in terms of regional allocations. In terms of shares, the preference is switching to Europe and Japan, in phase opposition with the United States (cycle, currency, monetary policy). Switzerland is a bottom/up theme to gamble on productivity. Relative caution continues in emerging countries due to the strong dollar and the political transition in China. Regarding State bonds, the preference is for US Treasuries against the German Bund, with the yield spread in December having hit its highest level since 1989.
If the shadow of Donald Trump hovered over the ISAG roundtable, a wait-and-see policy prevails on Trumponomics, regarding the questioning of globalisation, proactive goals of job creation or fiscal shock. The speed with which the market has moved from a deflationary threat to a reflationary opportunity is surprising, and there can be no doubt that 2017 will not be a long quiet river. The normalization of markets is far from a given, and uncertainty will be a marker this year for portfolio management.

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