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5 Good & 5 Bad Scenarios for Investors in 2017

Neil Dwane | 27/12/2016
bustling highway system

Summary

Peering into the next 12 months, Neil Dwane looks at how 10 hypothetical events – including a “soft Brexit”, the rise of “green bonds” and a Le Pen victory in France – could affect economies and markets around the world.

Key takeaways

  • A “soft Brexit” would be another important step toward a fully united Europe
  • Populism and new fiscal spending could boost economic activity after a period of draining austerity
  • Trump could introduce trade policies that “make America great” – at everyone else’s expense
  • The latest El Niño left many regions vulnerable to a polar winter that could reduce upcoming harvests

At the beginning of each year, it can be useful to anticipate some market-moving events that could potentially occur but are far from certain to actually take place. Here are ten such scenarios that could play out in 2017.

The Good

  1. Europe progresses
    After a torrid 2016 political environment for Europe – starting with the surprising Brexit decision and culminating in a dispiriting “no” from Italy’s voters – fears about the “dis-integration” of Europe may end up misplaced. If the elections Europe faces in 2017 affirm a constructive journey forward, political tensions could fall, confidence could grow about a “soft Brexit” outcome and progress could emerge. This, in turn, could help investment and employment to rise, which would be another important step toward a fully united Europe. Low valuations and reduced political risks might then combine to generate good equity returns.
  2. Green funding takes off
    Despite President Trump shifting US energy policy back toward coal and oil, global efforts to improve the quality of future economic growth could accelerate quickly thanks to “green bonds”. Issued by governments and companies to sustainability-conscious investors, these securities promote lower pollution and cleaner water and energy systems. With the idea of climate change challenged by sceptics in the US, corporations and investors could instead join forces to promote investment in less carbon-generating or more hydrogen-powered opportunities, which would minimize ecological damage. For Europe, China could lead the way.

  3. Fiscal stimulus boosts global growth
    The realization that negative interest rates were a policy error has led to demands for a more fiscally stimulative set of economic policies globally. If enacted, they could help relax the investment tension created by a distorted environment of interest rates hovering near zero. The presence of populism, whether in Europe or the US, could combine with new spending to boost economic activity after a period of draining austerity and narrowing deficits. If successful, we could see more investment and lower unemployment as confidence increases.

  4. “Ch-India” consumption takes off
    With China rebalancing toward a consumption-based economy, and with reform movements converging in India and Indonesia, the world is witnessing the creation of a new consumer market with 4 billion people. Incomes here are expected to grow rapidly in coming years, with the “American dream” alive and well in the south-eastern part of the region. Global brands may lose out to more local and affordable Asian names, but the direction of travel seems set as this upward-looking market follows in the economic footsteps of Japan and Korea.

  5. Active managers add alpha
    After a generally woeful year in terms of adding alpha in 2016, active managers could serve clients better by improving pricing and performance transparency, and by aligning costs more closely to meet client objectives. At the same time, the so-called “free costs” of passive investing could become unstuck as volatility widens spreads, lifts interest expenses, and reveals greater illiquidity and positioning concentration – all of which would further detract from indexed returns. Additional efforts to control high-frequency trading and implement extra financial transaction taxes, as well as the addition of MiFID 2 regulatory changes, could further increase costs, which would play to the strengths of the more skilful active stock picker.

The Bad

  1. Trump inspires trade protectionism
    True to his campaign promises, Trump could introduce trade policies that “make America great” – but at everyone else’s expense. NAFTA might be realigned, which would hurt Mexico, cause dramatic consequences for an already-collapsing Venezuela and reverberate through Brazil, which is already in the third year of recession. A stronger US dollar would, ironically, make life harder for Trump, so he could begin to target the key exporters to the US – China, Japan, South Korea and Germany, with the Asian countries feeling the painful effects as one.

  2. The Middle East stays troubled
    This region could easily become even more challenged in 2017. While the Islamic State may be targeted more effectively by its enemies, the recent coup in Turkey, the regional effectiveness of the Kurds, the disarray in Egypt and Libya, and the deteriorating detente between the US and Iran all hint at worse to come. For example, a new kind of Thirty Years War between the Sunni and Shia people still seems probable. Investors should be mindful that any of these developments may well underpin a stronger oil price.

  3. “Solar minimum” causes another polar winter
    While many weather-watchers focus on the El Niño and La Niña rotations in the Pacific, another key driver of global weather and temperatures is our sun, whose radiation and sun-spot activity may fall to record lows this winter. Despite occurring during a period of record agricultural abundance, the latest El Niño parched many major farm regions globally, leaving them vulnerable to a truly polar winter – which could reduce upcoming harvests. La Niña seems slow to arrive this time, raising fears about rising food prices and adding another leg to the reflationary inflation cycle.

  4. Central-bank credibility falls
    Some aspects of central-bank credibility failed in 2016 when negative interest rates did more harm than good in Japan and Europe. With Japan now adopting “fiscal dominance” – which makes monetary policy a slave to fiscal policy – interest rates may indeed remain low, but monetary policy could begin accommodating any and all fiscal desires of governments. Europe cannot follow this route per se, but with insolvent euro-zone banks still at risk, the European Central Bank will do everything it takes to keep economic growth moving forward – that is, until its efforts no longer work. The yen and euro should remain weak currencies until the US dollar changes course.

  5. France chooses Le Pen
    After enduring recent political shocks in the UK and Italy, Europe could be convulsed by the election of Marine Le Pen to the French presidency. Her suite of policies would be hostile to the EU, although some domestic gridlock should occur in France’s National Assembly. With France uncooperative, Europe would remain directionless and unable to move forward, beset by populism across the continent, confused by the complexities of Brexit and unnerved by the apathetic attentions of President Trump – all of which could further undermine NATO.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. ©Allianz Global Investors 2017.

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Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

Will Donald Trumpism Bury Davos Elitism?

Neil Dwane | 16/01/2017
Will Donald Trumpism Bury Davos Elitism?

Summary

Neil Dwane says the rumbling sound being heard by politicians and power-brokers at the World Economic Forum in Davos comes from a new political avalanche of populism – one that threatens to sweep away decades of pro-globalization sentiment and change the investment landscape.

Key takeaways

  • Populism and protectionism seem to be growing stronger around the world; consider the UK’s Brexit, Trump’s presidential victory and Italy’s “no” vote
  • These recent events – not to mention important elections on the horizon in France, Germany and the Netherlands – are not isolated incidents, but part of a new political trend
  • The previously dominant pro-globalization mindset is being challenged by its previous champions, and not by outside forces like radical Islam or communism
  • The multinational companies that benefit most from globalization are facing uncertainty; profit maximization, free trade and conspicuous consumption are in populists’ crosshairs
  • Investors should expect local and national politics to promote economic self-interest and slow global growth, while governments and corporations will want to be viewed as more responsible partners

To the great discomfort of many members of the global establishment, Donald Trump is already much more than the President-elect of the United States. He also sits atop a global political avalanche that began gaining speed in 2016 – through the pro-Brexit vote in the UK, the Republican sweep of the US elections and the resounding “no” heard in Italy’s referendum.

The rumblings of this new political force are sure to be felt this month in the beautiful chalets of Davos, the Swiss resort town that has become an annual place of pilgrimage for the most ardent champions of globalization and free trade. For decades, almost every G20 government and Fortune 500 company has sent a delegate to the World Economic Forum in Switzerland, where attendees rubbed shoulders with global power-brokers, celebrities and politicians – not to mention powerful celebrity politicians like Bill and Hillary Clinton.

But today, given the populism and protectionism that seems to be growing stronger with each passing election, perhaps the Davos elites will begin turning their eyes to the Milwaukees and Middlesbroughs of the world – the places where antiglobalization feelings are among the strongest.

In this mindset, many democratically elected governments have begun to decay precisely because they have been busy protecting their own self-interested goals – not the people they were charged to lead. So in a string of now-historic elections, those who felt overlooked and underestimated gave the boot to pro-Europe elites in the UK, opened the door to a defiantly non-establishment Trump in the US and began setting their sights on more victories to come.

As we discussed at length at our September 2016 Investment Forum, it is important for investors not to view these recent political events – not to mention the many other important elections on the horizon in France, Germany and the Netherlands – as isolated and unconnected. Rather, they are part of a continuum with deep roots.

In economic terms, one of the reasons the previously dominant forces of globalization and free trade are waning is that they have created a growing middle class in emerging markets at the expense of their counterparts in developed markets. In geopolitical terms, as the West failed to solve the challenges of Iraq and Afghanistan, the US has been toying with isolationism – which Trump campaigned upon – just as China and Russia have reasserted themselves on the global stage. All the while, South Korea and Japan’s populations continue to age rapidly, and rising populism in Europe is exacerbating that region’s existential challenges.

As the political ground shifts, the old guard is being viewed through a much different lens. The previous narrative of the pro-globalization set was that democracy and free markets would prevail, with American exceptionalism as the benchmark against which all others would be measured. That narrative is now being debunked by its own erstwhile champions, particularly Trump’s supporters, and not by outside forces like radical Islam or communism. It is becoming clear that the multinational companies who are globalization’s ultimate beneficiaries are, like the Davos elites, facing unstable terrain ahead. Profit maximization, free trade and conspicuous consumption by the few are no longer viewed as de rigueur, but are actually perceived as the problem.

Perhaps someday, the history books will need to make room for the era of globalization next to the Cold War, which also had an easy narrative of Western capitalism beating Eastern communism: By making the right choice, everyone could benefit, both personally and economically. However, as Lee Kuan Yew notes in From Third World to First, Asia was never likely to follow the Western path to democracy – not with its inherent contradictions and unaffordabilities.

Consequently, we as investors should begin to expect local and national politics to impede global supply chains and promote economic self-interest. The efficient allocation of capital will fall, which will be a drag on already-constrained levels of global growth. Yet at the same time, the new political trend will place new demands on the institutions that must deploy this much-needed capital, and there will be a growing call for governments and corporations to be seen as good partners. The practices of tax arbitrage, offshoring and profit maximization for shareholder value may soon be buried – if not wiped out completely. What is left when this storm passes will largely rest in the hands of the people who find themselves newly empowered.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. © Allianz Global Investors 2017. 93350 | COMM-150

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
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