It seems as if 2016 has had more than its fair share of big surprises—but in retrospect it is clear that many of these surprises were years in the making. In this paper, which is adapted from our annual Global Market Outlook presentation to clients, we provide broader context around the recent drivers of the global economy and capital markets, and discuss what we see as the themes moving forward.
A Year of Upsets—in Politics, Sports, and Financial Markets?
- While both Brexit and Donald Trump’s election came as surprises, perhaps we could have seen them coming.
- There was also a change in market performance from 2015 into 2016, and changes from the first half to the second half of 2016.
- We see a similar situation when we look at individual sectors: the top performers in 2015 are the bottom performers in 2016, and vice versa. Commodities, telecommunications, utilities, and consumer staples are notable examples.
Growth and Inflation Not Surprising
- As the U.S. economy has moved further into cyclical expansion, inflation has risen. Recent changes to both the executive and legislative branches of government suggest that economic policy-making will be stimulative and inflationary.
- In the United Kingdom, the pound sold off after Brexit, and several producers have begun to put through substantial price increases.
- Euro-area growth is being driven by domestic demand.
- Japan’s industrial sector is strengthening.
- We see stabilization in real growth (albeit it at low levels) for the world economy overall.
Rise of Populism: Peak Globalization?
- The rise in populism is a key risk because it represents a substantial departure from nearly seven decades of globalization.
- The final frontier of globalization is the movement of labor—that is, immigration. The social reaction has been strong, and the political impact aggressive.
Investment Implications of New Environment
- A small move in inflation and bond yields is creating ripples through the capital markets.
- We believe the expansion will provide an environment in which industrials, financials, and commodities perform better.
- Our preference remains for high-quality growth, but the opportunity set has expanded, and some of those companies are in cheaper areas of the market.
Listen to the presentation replay
Read the white paper