2017 Market Outlook: Cash And Sovereign Debt Favoured

Investors should expect equities and real estate to deliver the best returns in 2017, according to the 2017 Market Outlook from Source, one of the largest providers of Exchange Traded Funds (ETFs) in Europe.

However, the firm warns that these two asset classes are penalised by their high volatility and high correlation with other assets and that the low volatility and low correlation of both cash and sovereign debt mean these assets should be more favoured by investors overall in 2017. Cash remains at the maximum exposure allowed within Source’s Multi Asset Portfolio and sovereign debt is increased to Overweight1.

Paul Jackson, Head of Research at Source, said: “Forecasting is difficult at the best of times and the US election and Brexit have not helped. Nevertheless, our central scenario is one of continued low growth and low inflation, and therefore we expect the best returns during 2017 to be achieved on equities and real estate. However, the projected return is not enough to overcome the dual negatives of high volatility and high correlation with many other asset groups and we find cash and sovereign debt more preferable.

In addition, there is no room for high-yield within out Multi Asset Portfolio and investment grade credit plays only a minor role (both are downgraded). We remain bearish on commodities and they remain Zero-weighted (both gold and industrial commodities).

Under Source’s favoured “central” scenario, the firm envisages continued moderate global GDP growth and inflation (3% for each). It believes this will be enough to allow two Fed rate hikes in the next 12 months but not enough to end the supportive policies of other central banks including the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB), People’s Bank of China (PBOC) and Swiss National Bank (SNB).

Paul Jackson added: “We expect one further rate hike from the Fed during 2017 and do not expect that to trouble markets, especially as other central banks remain supportive. Though we doubt the efficacy of ECB, BOJ and SNB asset purchases, we expect them to continue. The BOE also appears set to remain vigilant against a slowing economy during 2017. Elsewhere, the central banks of China, Russia and Brazil will continue on a loosening trend, in our opinion.

Corporate high-yield spreads are expected to reverse the narrowing seen during 2016 and the anticipated rise in US default rates (to 7% due to our negative view on oil) further handicaps the return potential. Though the Fed raised rates in December 2015, it feels as if the widely anticipated December 2016 hike will be the first of this cycle (if it is not December, we think it will be shortly thereafter). Fortunately, beyond some initial hesitation, the markets are usually able to shrug off the early stages of Fed tightening.

Though emerging market assets are currently under pressure as a result of the Trump presidency, Source suspects that during 2017 their massive long-term fundamental advantages (e.g., healthy demographics, low debt burdens and attractive valuations) will see them rise again.

Source’s favoured assets for 2017

Sovereign debt: emerging markets

Equities: Japan and Europe

Real estate: Global

Cash: USD

Most favoured equity sectors

US: banks, telecoms

Europe: banks, construction, telecoms

Least favoured equity sectors

US: oil & gas, technology, utilities

Europe: autos, personal goods, real estate

Author: Dylan Jones

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