Macro: A Sea Change for Economies and Markets
1. The Rise of Nationalistic Self-Interest Continues to Upset the World Order
What we said: After political upheavals in the U.K. and U.S. during 2016, French and German voters will be among those in 2017 to test the persistence of anti-establishment/anti-globalization trends.
What we saw: While mainstream political forces returned to primacy in 2017, the geopolitical climate remains unsettled.
2. Central Bank Impact Fades
What we said: Global central banks appear to have reached an inflection point and will likely drive an increase in interest rates, inflation expectations and market volatility, and a stronger U.S. dollar.
What we saw: Monetary policy globally remained highly accommodative in 2017, and we witnessed a return to the familiar low growth, low-rates, low-volatility “Goldilocks” environment of the post-crisis years.
Fixed Income: Normalization Resumes
3. Real Interest Rates in the U.S. Continue to Push Higher
What we said: Expectations for higher growth and inflation are likely to drive higher Treasury yields and a steeper curve, though we don’t anticipate a break from the global rate tether.
What we saw: While three increases in the federal funds rate in 2017 pushed short rates higher, longer bond yields were flat and the curve flattened considerably as a result.
4. Credit Still Holds Appeal
What we said: The credit cycle is mature, but it doesn’t appear ready to turn just yet; when it does, more supportive fundamentals are likely to help absorb the impact.
What we saw: The credit cycle has life in it yet; credit spreads drifted tighter in 2017, and their narrow levels suggest risks in credit are skewed to the downside.
Equities: Back to Basics
5. Pro-Growth Trump Administration Fuels Outperformance of U.S. Equities
What we said: A more business-friendly environment – characterized by lower taxes, loosened regulations and robust fiscal spending – could provide a tailwind for corporate earnings and stock markets in the U.S.
What we saw: While the anticipated pro-growth legislation has been slow to materialize, robust corporate earnings growth drove U.S. equity indexes higher—though no faster than the pace of
many non-U.S. markets.
6. Alpha – and Active Managers Able to Generate It – May Stage a Comeback
What we said: The removal of artificially low interest rates could result in individual stock performance once again being differentiated by company fundamentals, to the benefit of high conviction, fundamental investors.
What we saw: Intra-stock correlations collapsed over the course of the year, creating a better environment for stock pickers and a sharp improvement in active managers’ performance relative to their benchmarks.
Emerging Markets: Both Winners and Losers Emerge
7. Economic Orientation Counts
What we said: In our view, fears that U.S. policy will drag down the entire emerging world are overblown; improved global growth should be generally supportive, though countries likely will be differentiated based on their key economic drivers—manufacturing vs. commodities vs. domestic.
What we saw: Buoyed by synchronized global growth combined with fundamental improvements and ongoing reforms, emerging markets equities and debt delivered strong returns in 2017.
8. China Risks Remain Significant
What we said: The world’s second-largest economy faces a number of ongoing issues—from asset bubbles to currency management— that require a particularly deft touch from Beijing.
What we saw: China’s need to bolster its financial stability hasn’t abated, and policy measures to accomplish it have contributed to volatility in the country’s stock and bond markets.
Alternatives: Helping Narrow the Return Gap
9. Volatility Can Work for Investors
What we said: We anticipate that the difference between long term investor needs and what can be generated from traditional sources of beta is likely to persist, highlighting the value of alternative risk premia and volatility-capture strategies.
What we saw: Though volatility has yet to re-emerge, the demand for alternative sources of returns and diversification continues, buoyed by the consistent attractive performance of strategies like equity put writing.
10. Private Debt Remains Attractive
What we said: Despite the potential re-emergence of banks as liquidity providers, it is unlikely that they will rebuild the infrastructure required to compete in similar, less-liquid credit. In addition, increased M&A activity will likely keep the private debt market well stocked with opportunities.
What we saw: The private debt market continued to attract significant capital in 2017, and the resulting competition for attractive investment opportunities has led to the emergence of pricing pressures.
Joseph V. Amato, President and Chief Investment Officer – Equities
Erik L. Knutzen, Chief Investment Officer – Multi-Asset Class
Brad Tank, Chief Investment Officer – Fixed Income
Anthony D. Tutrone