The New Abnormal

2017 Global Market Outlook

The search for investment portfolio returns is not going to get any easier in 2017 against a backdrop of record U.S. equity prices, narrow credit spreads and low bond yields.


Introduction: investment tourism

Brexit and U.S. President-elect Donald Trump make a complicated late-cycle outlook even less predictable. Investors will need to navigate stretched valuations in 2017 and a potentially more aggressive U.S. Federal Reserve (Fed) as they work out the policy direction of the new U.S. administration.

Introduction

The United Nations has designated 2017 as the year of sustainable tourism1 , which I believe is a worthy accreditation in these environmentally sensitive times. It is a theme that investors would do well to follow, in our view. The search for returns is not going to get any easier against a backdrop of record U.S. equity prices, narrow credit spreads and low bond yields. We need to be tourists in the investment sense and venture further afield in our search for investment returns.

The election of Donald Trump as U.S. president has thrown an extra element of uncertainty into our outlook. We believe markets are assuming that the new administration will have a policy mix that will boost growth, equities, and the U.S. dollar, as well as push the Fed into more tightening. But there are large uncertainties about the president-elect's views. Some of his campaign comments about withdrawing from trade deals and imposing tariffs on China, if enacted, have the potential to send the global economy into a renewed downturn. The post-election optimism driving markets in late 2016 could quickly reverse.

With this backdrop, we would respond in three ways: (1) diversify sources of returns, (2) use a robust dynamic asset allocation process to guide tactical positioning, and (3) seek effective implementation capabilities.

Russell Investments has, for example, incorporated strategies such as bank loans and mortgage prepayments into some of the firm’s multi-asset portfolios. These assets potentially reduce exposure to rising interest rates and help diversify away from traditional credit exposure. Mortgage prepayments can provide exposure to much healthier household balance sheets and benefit from rising rates. With emerging markets hammered after the U.S. election on Nov. 8, 20162 , we think there are opportunities in select countries and their equity, bond and currency markets.

We’re also making extra use of factor-based strategies. For example, our Conscious Currency™ strategy uses the factor constituents of value, carry and trend to help provide diversified returns. We believe that dynamically managing currency exposures will be essential in 2017 with policy-related volatility in these markets. Our portfolio managers have widened their direct investment capabilities to gain access to equity factors such as growth, value, quality, volatility, momentum and size.