3 Key Macro Themes for the First Half of 2017
February 2, 2017 By Sage Advisory
While politics and fundamentals continue to drive the investment outlook, at Sage, we believe it is the global macro landscape which is central to investing in the first half of 2017. As the new year unwinds, we see an overall favorable backdrop for risk assets given improving global data, robust earnings outlooks, and fiscal stimulus expectations. At the same time, we anticipate slowdown in the “trump trade” – or bullish near-term momentum – given that much of the optimism is already priced into markets. Still, the macro picture remains dominated by global monetary policy, fiscal policy follow-through and a volatile political landscape, leaving markets vulnerable to wide swings, overshooting and undershooting fair value. In greater detail, here is what we at Sage see as the three main factors influencing the next six months – and how we are adjusting accordingly:
Expect a more stable first half for fixed income
After the historically poor fourth quarter for fixed income, we expect both a more stable first half and some upside potential in the first quarter. We believe the rate sell-off was overdone into year-end and expect yields to remain in a fair value range during the first half of 2017. Increased equity volatility is also on the horizon, with some profit to be had in risk assets, and a slowdown in the pace of improving economic data supportive of core fixed income returns. While rate hikes combined with upside growth and inflation potential will continue to apply upward pressure to rates, we expect this to materialize later in the year. As in 2016, we expect upside opportunities in the first half and the second half to be more about risk mitigation.
Look to international diversification within equity allocations
We believe developed international markets will benefit from the global reflationary trend, weaker currencies, and still favorable monetary policies relative to the US. In addition, international markets, particularly Europe, are attractive from a valuation perspective. Given how much optimism is already priced into US markets, and the level of pessimism toward international markets, we see greater upside overseas in the next few quarters.
Take advantage of relative value opportunities
Two markets we believe had run too far into year-end were rates and the dollar. To this end, we have pursued relative value opportunities by adding duration and Gold to our strategies in order to benefit from the rollover in both rates and the dollar. While it may be tempting to focus on the domestic front for the first half of 2017, discounting the macro picture will do you no favors. With stability for fixed income, optimism for international equities and an emphasis on relative value investing, 2017 provides ample opportunities for those who invest wisely.
For more insight, please visit our Asset Allocation and Fixed Income Perspectives or reach out to the team at 512-895-4130.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.