Investment Perspectives 2017 | Mid-Year Review & Outlook

Executive Summary

In this mid-year publication, we review our January expectations and analyse some current key economic indicators before outlining the asset allocation that we recommend for the second half of the year.

We had increased our equity allocation at the beginning of the year

On the back of our positive macro-economic and equity outlook for 2017, we positioned the portfolios dynamically by increasing the allocation towards the equity asset class. We had also expressed our confidence that equity prices should be supported by an acceleration of global earnings’ growth and, so far, this has effectively proven to be the case. We had reaffirmed our strong conviction on emerging markets and our early-year global equity exposure was well diversified into the different regions. We have since increased our allocations towards European and also emerging markets equities. Hedge funds were an area of concern following a disappointing 2016 performance, but the different funds to which we are exposed have performed much better so far this year and contributed to the strong performance of portfolios.

Global growth has not been derailed by the many political and geopolitical events

Global economic growth is broad based and, for once, has matched expectations. Contrarily to the previous years, growth forecasts have been upgraded generally as confidence is high and investment and trade are picking up from low levels. Europe was facing a series of elections that could have had negative consequences for the European project, but populist candidates failed to beat those in favour of more European integration. The election of Emmanuel Macron as French president has boosted the chances for serious reforms in France and for stronger unity in Europe, especially at a time when economic growth in the Eurozone has surprised on the upside. Donald Trump’s administration continues to make many headlines but is struggling to introduce a new health bill and much promised pro-growth reforms. US equity markets have so far proven to be resilient to such disappointments.

The main central banks are still hoping for higher inflation

For various reasons, the monetary policies of the Federal Reserve and the European Central Bank have diverged markedly over the last years. While the ECB remains extremely accommodative, the Fed has turned more hawkish through the acceleration of the pace of interest rates’ hikes and the announcement of a plan to start shrinking its balance sheet. On one issue however, both banks are in perfect agreement: the lack of persistent inflation, which is one of the last indicators to really pick up momentum in recent years. At this stage, the Fed appears more confident that inflation will move closer eventually to its target as wage pressures finally push prices higher, hence its confidence in its ability to pursue policy normalization. On its side, the ECB continues to tread cautiously, despite a significant reduction of political risks and strong economic trends. Inflation numbers will continue to be observed closely during the second half of the year to help to determine the likely path of future monetary policies.

We remain in risk-on mode for the time being

The supportive global macro environment and the prospect of strong corporate earnings lead us to remain in risk-on mode, with an overweight allocation into equities being the main driver of portfolio performance. Despite ongoing concerns about the stretched valuations of most asset classes, in the wake of unprecedented monetary policies, we believe it is still too early to turn cautious. Equity prices are being supported finally by an acceleration of earnings’ growth and no longer just by the provision of massive liquidity and the anticipation of stronger growth. Finally, markets are not yet showing any signs of euphoria which typically characterize the end of a bull market, hence our overweight equity exposure.

In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


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