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No shortage of knock-out punches for markets in 2017

Glenn Freeman  |  24 Jan 2017Text size  Decrease  Increase  |  

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As President Donald Trump settles into the White House, we reflect on the major macroeconomic developments of 2016, how they may play out in 2017 and how investors should respond--or not.


Five key events shaped the global macroeconomic landscape in 2016, with the victory of President-elect Trump and Brexit topping the list.

"I would add the OPEC agreement to curb future oil supply, the attempts by the Chinese authorities to reverse the relative appreciation of the yuan, and the restoration of Brazil as an investor-friendly location just as momentous, and possibly more reflective of changing future investment conditions," says Andrew Lill, chief investment officer, Asia Pacific, Morningstar Investment Management.

These events will continue to evolve into 2017, "with no shortage of events that seemingly throw knock-out punches for markets".

"US debt ceiling negotiations set for March, the French election set for May, the German election likely in September/October and further stresses about high Chinese debt--all of which could trigger panic and column headlines on trading message boards and financial newspapers," Lill says.

For all the noise and sensational headlines, Lill emphasises the importance of investment fundamentals over knee-jerk reactions. He highlights the fundamentals-based approach Morningstar employs across its research and fund management businesses.

On asset prices, he believes the expected returns for 2017 are lower than for 2016, "and multi-asset portfolios are unlikely to generate return objectives on a buy and hold basis".

"While we don't pretend to be able to forecast near-term asset price movements, it is worth noting that in our view, fundamental valuations have remained largely steady across most major asset classes," Lill says.

Emerging markets focus

Morningstar Investment Management's portfolios will retain a bias towards emerging markets, Japanese and European equities, "with a cautious bias in fixed income towards Australian government and select credit exposures where additional income is not matched with additional balance sheet risks".

"The road ahead will not be smooth but the long-term investor can look through this uncertainty to the longer-term return outcomes," Lill says.

With Trump having now confirmed the US will not be backing the Trans-Pacific Partnership (TPP), it seems increasingly likely his administration will continue its anti-Chinese rhetoric throughout 2017 and beyond.

"On the other hand, emerging markets remain one of few asset classes that have attractive valuation characteristics," Lill says.

"Whether China continues to grow at 5 per cent, 6 per cent or 7 per cent is anyone's guess and is largely immaterial to our thinking. The more important risk is a reduction in the return to shareholders of businesses exposed to the Chinese economy and whether our fair value calculations could be impaired."

While he emphasises it would be "imprudent to allocate 100 per cent of a portfolio to emerging markets," investors also need to be aware of the long-term opportunity".

"Regional allocations and scenario risk based portfolio construction must play a strong role in the appropriate sizing of emerging market positions," he says.

"As long-term investors focused on our clients, we commit to utilising our global research platforms and our team's global asset allocation insights to continue our dedication to generating sustainable risk-adjusted returns consistent with our objectives."

As part of this intrinsic approach, Morningstar is launching an unconstrained multi-asset real return product in the first quarter 2017, "which will blend our insights into one portfolio that represents our purest implementation of the highest return and lowest-risk investment opportunities".

More from Morningstar

• The world awaits Trump; Catching up with Ian

Steady hand on the tiller or captain of a rudderless ship?


Glenn Freeman is Morningstar's senior editor.

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