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Institutional Update Q1 2017

 

The view from the Multi-Asset team

 

The view from the Multi-Asset team
2017 likely to surprise to the upside


We believe that growth and earnings look likely to surprise the consensus to the upside, especially if the new US president follows through on his promises of tax cuts.

The global economy ended 2016 on a firm note, with appearing to improve not only in the US, but also in other major economies. This bodes well for growth in 2017. Confidence surged in the US following the election of Donald Trump. Consumers, for example, are now their most optimistic since the turn of the millennium, according to a report from the New York-based Conference Board. 1


2017: Better than expected?

From a macroeconomic perspective, we believe 2017 is positioned to be a memorable year, with global growth exceeding rather than disappointing consensus expectations for a change. Going into 2016, there were clearly legitimate concerns about the sustainability of the recovery. These stemmed from a contraction in US manufacturing activity, which had, in turn, caused US growth to disappoint against the background of continued weakness in the developing world. However, some important ‘straws in the wind’ had already started to emerge to indicate that perhaps it wasn’t all doom and gloom.

We are seeing a growing probability that improving credit metrics, steady consumer spending and an expected improvement in capital spending (albeit off a low base), could produce a period of relief from the longer-term global economic stagnation.


Navigating negative rates

We are facing a world where ‘safe assets’ pay nothing or even charge you to own them, yield can only be found at higher risk levels, and markets, which have benefited from falling yields, are vulnerable to a change in direction. The question for investors is: What to do? We believe there are opportunities worth pursuing, along with risks that require careful mitigation. We believe in following six simple steps:

Sustainable investing: Not justabout returns

As environmental, social and governance (ESG) issues take centre stage in 2017, we suggest that investors look at whether including ESG criteria improves measures other than profitability. In our 2016 Investment Views we stated that ESG investing would move centre stage for many investors. Indeed, an October 2015 ruling by the US Labor Department, which permitted the managers of pension funds and 401(k) plans to evaluate ESG factors as a part of their investment process, represented a key turning point for sustainable investing.

While investors have seen ESG criteria as increasingly important for reasons of best practice, or because they or their clients care about these issues, the evidence that incorporating an ESG perspective improves returns has been mixed. Indeed, our own internal study2 using external ratings on companies did not find any evidence of improvement of returns from buying the best ESG companies, but, at the same time, we found that excluding the worst did not detract from performance.

However, we ask:

  • Should investors be looking at whether including ESG criteria improves measures other than investment returns?
  • Is there evidence that the risks attached to ESG factors are increasing?
  • Is the nature of sustainable investing itself changing?

Where’s the growth?

In 2017, our primary investment thesis is based on the belief that investors are underestimating the prospect of stronger growth and inflation in the US economy, relative to the rest of the world over the next year.

Following an easing of financial conditions over the past year, with government bond yields and mortgage rates having declined significantly, we see positive trends emerging in US credit growth and the US housing market in particular. In our view, this implies higher longer-dated US bond yields and a stronger US dollar. As a result, we believe that many of the areas that have struggled through 2016 now appear to offer some of the most attractive opportunities.


Multi-asset’, not ‘multi-silo’

Traditional multi-asset investing appears to be stuck – dominated by a silo-based approach, with distinct teams using different analytic frameworks researching each asset class in isolation. We argue for a more unified approach, combining top-down and bottomup perspectives with a common framework for assessing and implementing opportunities across asset classes.


1https://www.bloomberg.com/news/articles/2016-12-27/u-s-consumer-confidence-index-increased-to-113-7-in-december
2How do ESG ratings help the investment process? (July 2013)

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