“Investors will find themselves navigating a significantly different economic and financial environment in 2017,” said Monica Defend, head of global asset allocation research at Pioneer Investments.
Defend offers five major themes for investors with an active and risk-aware mind-set:
1. Reflation trends call for a flexible and unconstrained approach to fixed income investing
We believe that the “Trump effect” will favour reflation trades, which can be played across a broad spectrum of fixed income investment strategies around the world. Within the theme of reflation, we like inflation-linked bonds in the US and in Euroland, where we believe a very low inflation pattern is still being priced in.
We believe the US Treasury curve will continue to steepen on improving macro fundamentals, as we potentially enter a new regime of expansionary fiscal policy. Assuming that the path of Fed hikes stays relatively slow, US corporate earnings are likely to improve in this environment and defaults are probably going to normalise, after the energy sector-related spike in 2016. In this environment, corporate debt will probably outperform sovereign debt in both Europe and the US, even though total return for the asset class may be limited compared to 2016. Loans and other floating rate strategies could be compelling opportunities. Investments linked to real asset dynamics could also benefit in a potentially higher inflation environment.
2. Profiting from potentially stronger growth via equities
Global, US and Asian equities may benefit the most from a broad reflation environment and national initiatives, where earnings growth should see better support. This will be less so in Euroland, where growth perspectives are more moderate and political and headline risk remains high. We also favour Japanese equities, as Japan is now the centre of pro-growth and reflationary experiments and the internal political turbulence appears to be more contained. Premier Abe’s efforts to combine monetary policy with fiscal expansion and a strong dollar all support positive momentum for Japan, as does the potentially more dominant role for Japan in Asia, should the US becomes more domestically-oriented.
3. The search for income continues, but will require an increasingly selective approach
There are still pockets of value left in European and US credit, however the margin for carry is now slimmer than a year ago. Emerging markets can play a role in the search for income but a more selective approach is needed and closer attention paid to the after-effects of the US elections. We also believe it will be important to broaden the income sources by including multi-asset approaches, fixed income (especially flexible, unconstrained, higher yielding) and equities, while focusing on security selection and emphasising quality. Investments linked to real asset dynamics could also benefit in a potentially higher inflation environment.
4. Currencies: strong dollar, tactical opportunities
We think that the US dollar will stay supported by the Fed’s interest rate normalisation process and the current asynchrony of central bank policies, which could be exacerbated should the “Trump effect” spur economic growth and inflation. Opportunities could come from volatility in emerging market currencies. In general, we see currencies as an important lever for tactical asset allocation and a key value-add through active portfolio management.
5. Hedging, protection strategies and diversification to deal with geopolitical risks
Even though we expect a slightly stronger economic growth in 2017, we continue to see a number of structural risks on the radar, such as the risk of policy mistakes, high debt exposure of global economies and geopolitical risks, especially in Europe, where the political calendar in 2017 will be very crowded. In this environment, we believe that broadening the source of diversification and incorporating efficient hedging strategies will continue to be extremely important to try to protect investors’ assets. In this regard, gold could help smooth potential spikes in volatility and real assets in general may offer inflation protection and have a generally lower correlation with traditional asset classes, which may be helpful during phases of market stress.
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Important Information
Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of December 2016. The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investment product. There is no guarantee that market forecasts discussed will be realised or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
Date of First Use: January 16, 2016.
