Outlook & Commentary

It’s business as usual when it comes to the investable universe. Halfway through 2017, the dynamics that have been influencing investments most are little changed: Geopolitics, monetary policy and the world economy still lead the way.

The FOMC is unlikely to raise rates at this week’s meeting. Instead, market participants will be paying close attention to Chair Yellen’s views on increasingly weak inflation data, as well as any possible hints about tapering.

European Central Bank president Mario Draghi has begun taking steps to normalize monetary policy and he will say as much at this week’s ECB meeting. But market reaction will dictate the speed of the journey.

After a strong first half to 2017 for equities, the message for the remainder of the year is to look for returns more carefully in the second half. The “country factor” will be key: Investors can no longer rely on a rising tide of cyclical data to lift all boats.

We do not expect any change in stance from the Bank of Japan at its latest monetary policy meeting. Despite its attempts to control the yield curve, domestic economy fundamentals and inflation still need to improve.

Raising the federal funds rate is just one part of the Fed’s plan for higher interest rates. Another part is the somewhat tricky process of purging $2 trillion in US Treasury and agency securities from the Fed’s balance sheet. The impact will be felt by investors and consumers and may even widen the US budget deficit.

Powerful interactions between domestic and global forces continue to suppress inflation rates around the world. Meanwhile, long-standing economic relationships – such as the linkage between labor-market tightness and labor compensation – have adjusted or broken down. Case in point: The persistent decline in the US unemployment rate – from 9.8 per cent in 2009 to 4.3 per cent today – has not resulted in commensurate increases in wages.

It is well-known that the active management industry has recently encountered its share of challenges. In the United States in 2016, USD 500 billion moved into passively managed index funds, while USD 340 billion exited actively managed funds. Yet it is our belief that this shift – while notable – is misguided for three key reasons.

In a clear signal from voters who feel left behind by globalization, populist political parties have been gaining ground around the world. This could create serious long-term headwinds for economies and markets, including lower growth and higher inflation.