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The Case for Macro

Our Dynamic Allocation Strategies team explains why global macro investing offers many potential benefits when included in an investment portfolio. Read More (PDF)

Emerging Markets Outlook for 2017

The past 12 months have been fairly turbulent in emerging markets, but a number of factors support emerging market performance.  Read More (PDF)

U.S. Elections: Now What?

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The November 2016 U.S. elections may go down in history as among the most unconventional, leaving many investors wondering about the investment implications.

Longer term, we believe active management's ability to adjust exposures to specific companies, issuers, sectors, and markets will play a valuable role in portfolios as investors brace for periods of higher volatility resulting from geopolitical and economic uncertainty.

As for U.S. election implications, our investment teams weigh in below.

Global Equity Team Insights

  • Despite near-term uncertainty surrounding how a Donald Trump administration and Republican Congressional majority may actually govern, we expect a continuation of the recent reflationary market environment as we look ahead to 2017. U.S. core and services inflation are increasing and have returned to pre-crisis levels, while the relatively stable U.S. dollar is driving up import price inflation. Core consumer price index (CPI) outpacing core producer price index (PPI) suggests a potential return to corporate pricing power. The global markets had already begun to recognize these influences prior to the U.S. election. We believe higher yields are likely to persist, leading to a continuation of more cyclically-oriented equity-market leadership.
  • This year, a stable U.S. dollar and a rebound in China's housing-market activity have led to a recovery in the mining, energy, and industrial metals complex. Expectations of higher infrastructure spending under the new Trump administration are likely to provide additional support to these areas in the near term. We continue to see upside risk to nominal growth and are finding opportunities in high-quality companies with rising earnings prospects that we believe are not fairly reflected in valuations. In addition to the industrial and resources sectors, we continue to be more constructive on financials in anticipation of higher rates and steeper yield curves—trends that are likely to persist following the election.
  • We expect continued volatility in the coming weeks as market participants await clarity regarding what a Trump cabinet may actually look like, and how it will attempt to shape/prioritize policies. The trading environment is very fluid: Speculation as to how campaign rhetoric will translate into policy is driving significant price action across asset classes, sectors, countries, and currencies. Similar to prior periods of pronounced market turbulence, the team is fully engaged and we believe well prepared to make adjustments, both defensively and opportunistically, as we deem appropriate.

U.S. Growth Equity Team Insights

  • Immediately following the U.S. presidential election, it is clear that neither the polls nor the financial markets anticipated a Trump victory. There are few details as to how the president-elect intends to implement his proposed policies or if his proposed policies will change once he is in office.
  • In the near term, there is likely to be significant speculation as to the implications of a Trump presidency and a Republican-controlled Congress. Immediate reactions on the day after the election were swift and pronounced in certain segments of the market. Biotechnology and pharmaceutical stocks rallied as investor fears of pricing pressure from a potential Clinton administration subsided. Stocks of companies with links to infrastructure spending also rallied on the anticipation of increased government spending on such projects. Areas of the market that experienced adverse reactions to the election results included companies that could be negatively affected by changes in the Affordable Care Act and global trade policies.
  • Going forward, near-term market movements will likely be based on speculation in the absence of policy details. As bottom-up, fundamental investors we believe it is important to keep a long-term perspective and avoid knee-jerk reactions. We will continue to analyze the risks and opportunities of likely policy changes for current and potential holdings, making adjustments as necessary.

Fixed Income Team Insights

  • Like most markets, the fixed-income markets experienced a bout of volatility during the overnight hours, but conditions improved by the time the U.S. markets opened.
  • The eurodollar futures market continues to predict a rate hike following the Federal Open Market Committee's (FOMC's) December 14 meeting.
  • Several measures that relate to fixed-income market liquidity conditions are little changed day over day, including credit risk spreads, swap spreads, the TED spread (the difference between the interest rates on interbank loans and on short-term U.S. government debt), and implied volatility on U.S. Treasury futures. These conditions should allow for primary market issuance and secondary market trading activity to occur.

Dynamic Allocation Strategies (DAS) Team Insights

  • This latest surge of populism, which has been a major macro-thematic influence for the DAS team for several years now, was again vastly underestimated by both pollsters and by the betting markets.
  • Trump's appeal as an outsider resonated with middle America and his continued promises to focus on fixing the internal problems of the country and espouse the type of nationalistic tenets that have become a fixture of populist movements gained great traction among more than enough people not typically on the radar screen of the major media outlets. While our most recent election probability matrix put a Republican sweep at 20%—a relatively slim chance even with recent upticks—our sense was that if Trump did find a “path to 270” that he would likely bring the Senate with him. We anticipated the potential for a large downside event in the case of a Trump victory and were able to rest relatively easy last night as the tide turned to Trump.
  • Uncertainty now reigns (versus the gridlock we expected would come from a Clinton victory and a divided legislature) and will likely remain to some extent through early next year as Trump's cabinet appointees and path forward on issues like immigration, trade, foreign relations , health care, fiscal and monetary policy are clarified. It remains to be seen on how or whether the way in which Trump ran this campaign will have a lasting impact on how future election cycles evolve and/or how political parties in the U.S. coalesce around their chosen candidate.
  • But of utmost near-term importance is how Trump will spend his time during the next couple of months—with whom will he meet, how will he refine and message his intended policies and goals, and whether he will truly work on the “unification” aspect that he emphasized in his acceptance speech early this morning.
  • Equity markets began to sell off yesterday evening as early exit polling indicated an unexpectedly strong early showing by Trump. Most (equity) futures markets, and a number of emerging market and Asian currencies continued to sell off to overnight lows with the Mexican peso off by as much as 13%, U.S. equity futures down more than 5%, and Japan equity futures down more than 6%. However, as evening turned to morning in the U.S., a marked rebound off of lows was noted almost uniformly as investors began to digest the news and wrestle with the removal of one large uncertainty (that of the result) but faced with a forward-looking environment filled with even more and unexpected uncertainty. In this way, investors appear to be acting on the message learned from Brexit; however, it remains to be seen as to whether this immediate reaction proves appropriate.
  • Some aspects of our initial thinking revolve around:
    • A Republican sweep equates to a pro-business environment
    • Market gyrations (especially today's rebound from overnight downturn) likely a near-term overreaction to relief of removal of election uncertainty but, in our view, perhaps overlooking policy and institutional uncertainty in the months ahead
    • Result strengthens U.K.'s hand and weakens European Union's hand in the Brexit negotiations
    • Italian Prime Minister Matteo Renzi faces a large uphill battle in next month's referendum
    • Angela Merkel, chancellor of Germany, also now faces headwinds in Germany
    • Marine Le Pen has gained momentum in France
    • Trump “Milestones” we will be monitoring:
      • With which foreign leaders will Trump first meet?
      • Who will be considered for Presidential appointments and/or cabinet considerations?
      • Are first efforts meant to be along easier paths to generate quick wins and utilize the Republican sweep (i.e., tax reform) or longer, more time-intensive and difficult pursuits (i.e., repealing Obamacare)?
      • Trade:
        • Trump likely more free-trade oriented than his campaign posturing
        • NAFTA: Trump can remove with less effort than TPP
        • TPP: Fast-track already granted by Congress provides guidelines on what can be (re)negotiated by President—possible that Trump reworks it or kills it altogether
    • Probability of U.S. secular stagnation has dropped a bit
    • Next election cycle (Presidential mid-term) presents favorable tailwind in terms of further cementing or expanding Republican control of Senate