We are taking a disciplined approach to asset allocation in 2017. Our challenge will be to separate the signals from the noise.

While the US and global economies appear to be on solid ground, the decline of globalization and subsequent rise in populist movements, as reflected in the Brexit vote and election of Donald Trump, have implications for many equity and fixed income asset classes.

EQUITIES

Global equities should continue to enjoy tailwinds from easy central bank policies from the European Central Bank and the Bank of Japan.

In the short term, there may be headwinds for the United States and emerging market countries given the US Federal Reserve is in the tightening stage of the policy cycle. However, we think it will be a slow and cautious path to normalization, which will likely keep financial conditions steady for the near term. Central banks have also been making a conscious effort to telegraph their plans well in advance of implementation in order to avoid surprising the market.

While expensive, US equities are arguably the best-positioned asset class following the election of Donald Trump. Many of his ‘America First’ policies, if enacted, would likely be a catalyst to the economy and domestic equities. However, some of his rhetoric on trade and immigration poses a risk to companies and sectors with significant overseas revenue exposure. The same risk applies to economies and markets that rely heavily on exports to the US.

FIXED INCOME

In an environment of low growth, low inflation and low bond yields, we have been cautious toward fixed income. We expect the Federal Reserve to take a gradual approach to raising rates and the US economy to continue growing at a measured pace in 2017. While the low point for inflation and yields may be behind us, elevated levels of political uncertainty going into 2017 support our cautious outlook for fixed income in a multi-asset-class portfolio.

ALTERNATIVES

We continue to recommend the use of liquid alternatives for potential downside risk protection, diversification and better risk-adjusted returns in multi-asset-class portfolios. Alternatives tend to have a low correlation to equities and they have traditionally performed well during periods of market volatility and uncertainty.

View Our Full 2017 OUTLOOK

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