What does 2017 have in store?
In closing a year of remarkable geopolitical events, there are still many unknowns that will only be revealed when the dust settles from the major elections and referendums across the globe.
Natixis Global Asset Management have announced insights from some of its leading mutual fund managers.
Volatility Ahead: Proceed with Caution
Downside risk is currently elevated at above average, although not at extreme levels for international and emerging market stocks.[1] For U.S. stocks, the measure is slightly below average. This may seem counter-intuitive given the modest gains delivered by stocks thus far in 2016 and the relatively positive market reaction to the U.S. presidential election results. But perhaps it isn’t all that surprising.
Recall the rollercoaster stock market of the first quarter of 2016, when investors became concerned about the slowdown in Chinese economic growth. Almost a year later, the health of the Chinese economy continues to be a global risk. Add to that the wildcard of the direction of U.S. and Chinese trade relations post-election. Other concerns weighing on global markets include rising interest rates in the U.S., a weak European recovery weighed down by immigration complexities and a refugee crisis. Mid-year, Brexit also added a pint of uncertainty to the world order.
Against this backdrop, it appears the only certainty is persistent uncertainty. This uncertainty has contributed to a relatively wild ride in the U.S. stock markets over the year, where we have seen a trough to peak move in the S&P 500 Index of over 20%.[2] While we do not view global equity risk at extreme levels, we do believe investors should proceed with caution.
– AlphaSimplex Group
Commercial Real Estate Remains Positive
The U.S. economy regained momentum in the second and third quarter of 2016 and is expected to finish the year at 2% real annual growth. Yet, despite steady job growth, a low unemployment rate, signs of accelerating wage growth and increases in the CPI (consumer price index), normalization of U.S. monetary policy remains on hold as the Federal Open Market Committee (FOMC) continues to weigh risks to U.S. and global growth. Most observers believe the FOMC will raise the overnight lending rate in December and the long end of the U.S. yield curve has already moved in response to expectations of faster growth and higher inflation post-election. At the same time, long-term interest rates remain near or below zero in many countries.
In this global low-yield environment, investor interest in U.S. commercial property remains strong. Increased direct foreign investment has helped drive property yields to record lows. As a result, investor concern over current property valuations remains heightened and return expectations have moderated. Surveys suggest total return expectations from unleveraged core property to be lower but positive over the next five years. Lower but positive return expectations reflect the generally strong property market fundamentals that remain in place. We expect property income growth will gradually downshift to more “normal” levels over the long term as vacancy rates are now below long-term averages in most markets and rental rates are near or above pre-crisis peaks.
Even in an environment of moderating returns, commercial property continues to present a compelling investment opportunity relative to other asset classes in this world of low yields. Despite a strong rally in U.S. stock prices and a sharp sell-off in U.S. government bonds in the days immediately following the election, we anticipate little change in economic and property market fundamentals through the first half of 2017. With a clear and strong earnings outlook over the next several years, real estate should continue to be competitive with other asset classes on a risk-adjusted basis.
– AEW Capital Management
Return to Growth (Slowly)
A return to growth could create a very unpleasant surprise for many investors, as investments widely perceived as safe could be riskier than those perceived as risky. Investors tend to look at the risk of a stock as being the potential deviation of earnings from the anticipated level, and pay little attention to price. We have been saying for some time that low-volatility businesses priced at historically high relative P/E ratios are riskier than higher-volatility businesses priced at low relative P/Es. With interest rates so low, the stable, low-growth businesses that pay out a high percentage of profits as dividends have become favorite “bond substitutes” for investors seeking higher yield than is available in the bond market. These companies have typically been priced at lower-than-average P/Es, but today sell at substantial premiums. Even if the businesses perform about as expected, there is substantial risk should the P/E ratios revert to their long-term averages. If interest rates rise, as we expect, then P/E reversion is the likely outcome.
– Harris Associates
Sustainable Investing Continues to Grow in Importance
Like with Brexit, the U.S. is divided. The result of both may indicate a major shift in society. While we have seen this shift for a while, it has become more visible, and long term, structural and sustainable solutions are needed. Globalization is important as it leads to quicker development and lower poverty in emerging countries, but we should have a more thoughtful approach and manage the impact on local (developed market) manufacturing and employment better.
Urbanization in itself is a positive trend, with more access to education, health care and employment, and less negative impact on climate change, but we cannot forget the people living outside of cities. More than ever, we believe sustainability issues are driving the result of the elections. Furthermore, sustainability issues have been discussed more so now than during the campaign, and are likely to remain important topics: equal rights, fair treatment of women, tax evasion and fair tax contributions, general ethics. This strengthens our belief that thematic and sustainable investing will continue to grow in importance.
– Mirova[3]
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[1] The Downside Risk Index (DRI) is a proprietary index designed by AlphaSimplex to reflect the recent downside volatility of equity markets. Here, downside volatility is a measure of the extent to which recent volatility in an equity market’s daily returns has resulted from negative price moves (as opposed to volatility resulting from positive price moves). The DRI can range from 0 to 100, and higher values indicate that the recent level of downside volatility has been high relative to historically observed levels of downside volatility. The DRI is not a prediction of future returns or volatilities of equity markets and investors should not rely on this index when making investment decisions.
[2] Source: Bloomberg. Data from January 1, 2016 to November 15, 2016. Weekly closing levels shown in the graph are the closing levels from the Friday of every week (1/1/2016–11/11/2016). Past performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
[3 Mirova, a subsidiary of Natixis Asset Management, is operated in the U.S. through Natixis Asset Management U.S., LLC.