Investing Opportunities This Quarter

Written by Richard Turnill

We see three interrelated themes shaping investing this quarter:

broadening reflation,

low returns and

the need for a different approach to diversification.

We believe reflation is going global, and the reflation trade—favoring assets likely to benefit from rising growth and inflation—has room to run.

We see muted returns across asset classes in the coming five years, as structural dynamics such as aging populations help keep us in a low-return world.

We believe investors need to go beyond broad equity and bond exposures to diversify portfolios in today’s market environment.

Against this backdrop,

we broadly prefer:

equities over fixed income, and
selected credit over government bonds.

We also advocate:

a broader diversification approach that includes adding factor exposures and asset classes such as private credit and real estate.

Looking for more specifics about where we see opportunities? Here are a few investing ideas to consider this quarter.

Non-U.S. equities

U.S. equities do not look cheap, especially with gains post the U.S. presidential election powered mostly by multiple expansion. This helps explain our preference for:

European,

Japanese

and emerging market (EM equities),

where valuations look more reasonable and gains have been driven more by expected earnings growth.

To be sure, forward earnings expectations have a dismal track record of hitting the mark, with overoptimistic forecasts often ratcheted down as the year drags on yet we see reason for optimism in 2017.

Non-U.S. markets tend to have greater leverage to growth in global industrial production, our research suggests. We see this pointing to an even bigger earnings boost from stronger global activity as reflation accelerates and broadens.

With regards to EM equities in particular,

We like them because we see companies improving profitability and benefiting from global reflation.

We expect EM equities to be among the biggest beneficiaries if worldwide expansion powers ahead and trade keeps recovering as purchasing managers indexes suggest.

We also expect small caps, cyclicals and banks to benefit as reflation broadens. As a result, we like the size and value factors. The latter still looks cheap to us globally.