The Income Dilemma: seeking sustainable income in an era of paradigm shift
Income shortage is set to be one of the biggest challenges for investors in the future and it comes at a time when we are approaching a major paradigm shift from monetary to fiscal policy. We analyze how investors should consider exploring opportunities across a broader range of asset classes in an effort to avoid the low yield trap, while keeping a strong focus on downside risk mitigation.
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The Fed: Making Good on its Goal of Normalizing Rates
For the second time this year, the Fed has announced a 0.25% rate increase. FOMC members held firm to their projections for one additional rate increase in 2017, and three hikes in 2018. We believe the Fed is making good on its goal to normalize rates and reduce potential for asset bubbles, as well as its mandates to foster full employment and maintain price stability.
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UK Election Results: The Unexpected is Back
The unexpected has again been the outcome of the UK election: the Tories have lost their Parliamentary majority, while the Labour Party has substantially increased its position. This result triggers a new period of political instability, with PM May’s position being substantially weakened and increased uncertainty likely to have an impact on Brexit negotiations.
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Political Crisis in Brazil: Contagion Risk Limited
President Temer took office less than one year ago after the impeachment of Dilma Rousseff; his popularity rating is very low, as he has been trying to push through some unpopular reforms in order to rein in the nation’s depleted public finances that have been badly damaged by two years of recession. The current political turmoil could shift the focus from pension reforms to elections, with an outcome of no pension reform being implemented. We have taken a more cautious stance towards Brazilian debt on the back of recent events, but expect the crisis to be contained domestically.
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Trump Spooks the Markets
The talk of impeachment remains speculative and on the margins. We would estimate the likelihood of impeachment this year is only 10% with a modest rise to 20% in 2018. We believe a 5-10% correction could occur this year given the likelihood that Trump economic policies will at a minimum be delayed, and also due to increased geopolitical risks in Syria and elsewhere. But overall, we believe that the equity bull market is still intact.
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Macron Win Positive for European Risk Assets
We expect that Macron’s future actions will be in the tradition of supply-side reforms, coupled with socially-responsible stabilizers. As fears of political unrest have eased in the short-term, we believe reflation trades will take center stage again, with a renewed focus on economic fundamentals. As political risk has eased, the potential for tapering talks has intensified and could impact the currently very low level of European interest rates.
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How is the US Equity Market Pricing Trump’s Tax Reform?
Our view is that the market has priced no more than 10-20% of the value of the proposed cuts and we tend to agree with the market since there is not room to price in more than that at this point. While we wait for further clarity on the tax reform, market focus will be on earnings and Q1 is shaping up to be one of the best quarters in the last 5 years in terms of earnings growth.
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Japan: Enjoy the Vibrant External Demand
Japan is going through a positive macro momentum, mainly supported by the uptrend in exports. Ongoing support from monetary policy is today complemented more by expansionary fiscal policy. We expect inflation to be heading higher in H2 2017, but BoJ will likely remain extremely accomodating until inflation is strcuturally close to or above the 2% target.
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US: Waiting For Trump to Deliver
In our view, recent figures have confirmed that the US economy has substantially changed since H2 last year, in line with Fed's perception. Fiscal policy will likely remain expansionary, but it is unclear how and when this will find its way through the political process. Inflation is likely to remain stable for the remainder of the year, while Fed is moving towards two more rate hikes in 2017.
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EU: Can Economic Strength Cure Political Fragility?
The Eurozone recovery is progressing, although some risks remain tilted to the downside. Anti-Eu results over the next political election may interfere with a sustainable economic recovery. ECB will likely maintain its accomodative stance, but the economic and financial stress situation has improved.
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