Following the Brexit vote, election of Donald Trump and ongoing backlash against globalisation, the world is today at a crossroads, with economic growth poised to accelerate – if populist politics and protectionist trends don’t cause a slowdown - that is the view of KBL European Private Bankers (KBL epb), the Luxembourg-headquartered private banking group, which today released its 2017 Global Investment Outlook, covering the economy, financial markets and key asset classes.
Reflecting an ongoing recovery in industry and energy, higher consumer spending and reduced austerity, the pace of worldwide expansion should increase over the next 12 months, argued Jean-François Jacquet, Chief Investment Officer, Luxembourg, KBL epb. Nevertheless, he identified three core risks to this scenario, including “a rising tide of populism, a potential bond-market crash, and one or more major cyber attacks.”
Focusing on advances in digitalization, and especially “smart” robotics, Ilario Attasi, KBL epb’s Head of Group Research, highlighted how such innovation is negatively impacting long-term employment growth – particularly among the working poor and struggling middle class – thus fueling the ascent of populist parties. "One of the peculiarities of our age,” he said, “is that technology is exacerbating current levels of income inequality and, at the same time, giving voice to those who oppose such trends.”
Turning to the investment outlook, Attasi said that worldwide equity markets are likely to remain volatile but should nevertheless rise, on balance, by mid-single digits in 2017.
In Europe, he indicated a preference for value-oriented stocks and more cyclical sectors, such as materials and industrials – backed by positive commodity price trends, slightly rising inflation and improving consumption indicators.
On the other side of the Atlantic, he said that “infrastructure investment should support construction, while the outlook is also positive for defense, energy, mining, pharmaceuticals and insurance. Likely losers include renewable energy, exporters, consumer staples and healthcare services.”
While it was another difficult year for Japanese equities – despite strong central bank support – companies there are becoming increasingly efficient, with earnings growth likely to reach mid-to-high single digits in 2017. Over the same period, Attasi sees promise in emerging markets, especially commodity exporters.
Meanwhile, bondholders should brace themselves for a challenging year, when Trumponomics will almost surely lead to rising yields. For that reason and given their limited correlation to equities and fixed income, alternative strategies should offer significant diversification benefits as part of a balanced portfolio.
Concluding with currencies, Jacquet said that KBL epb’s outlook on the EUR/USD is neutral, that sterling will face strong headwinds and that commodity-linked currencies should recover.
