Asset allocation conditions have rarely been that favourable. Reflationary forces are now firmly in place, as reflected by the steep increase in inflation and commodities expectations -oil prices have risen by almost USD 10 despite the dollar rally. Interest rates have steepened as deflationary risks have abated, which had a dual impact on yields. Long term rates have risen and the yield curve has steepened. This, in turn, should have a favourable impact on credit supply and, as such, lead to an increase in final demand. Yields have become more attractive across the board, in, both developed and emerging bond markets.
Investors are optimistic. Against this backdrop, equity and credit markets delivered strong returns, driven by more positive macroeconomic news flow. Furthermore, the election of Donald Trump on a promise to radically change tax policy in the US has enabled domestic growth outlook to be revised upwards. Markets are willing to believe that this positive shock could spread to Europe.
Caught between hope and uncertainty, market trends will not be linear. We are entering into a year full of hope. Beyond the political measures, which always have their share of difficulties in terms of implementation, confidence is a critical factor for performance. On this point, time is scarcely supportive for the simple reason that “market time” generally passes faster than “macroeconomic time”. Furthermore, risk factors are far from absent, particularly in Europe given the busy political agenda. Investors will have no other choice but to be flexible and reactive
The ability to adapt investment strategy is going to be critical. Investors will need to be reactive, being able to switch to safe-havens as well as to return to risky assets if volatility was to increase. The good news, in this early part of the year, resides in the potential diversification provided by the recent in interest rates rise. US government bonds, the ultimate safe-haven asset, are now offering some yield. Similarly, equity volatility is stable at all-time lows, which represents a cheap hedging opportunity.
As was the case in 2016, performance in 2017 is likely to be generated during a few key periods, which must not be missed. We are convinced that multi-asset management investment strategies provide the opportunity to capitalize fully on their diversity.
Global Head of Multi-Asset, Institutional Clients