Download 2017 Market Outlook: 15 Experts On What To Watch

2017 Market Outlook: 15 Experts On What To
Watch
January 3, 2017
by Orla O'Brien
of Loomis, Sayles & Co.
Every six months, we share insights from Loomis Sayles portfolio managers and analysts; what are the
current themes and risks shaping their investment decisions? Looking into 2017, geopolitical shifts,
rising rates, regulatory changes and new proposed policies from President-elect Trump will all be key
factors. Read on for quick takes across a variety of asset classes and sectors:
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Geopolitics
"In country after country, we are seeing populations continue to move down a divisive nationalist path the extremes may gain traction while the middle ground gets hollowed out. This will likely cause
challenges for governing bodies to keep unrest at bay and bring new policy to bear. How will this
stronger growth in the short term be paid for in the long term?"
— Elaine Stokes, Portfolio Manager, full discretion team
Europe
"European political dynamics will take center stage in 2017. Markets are likely going to be keenly
sensitive to the performance of populist parties in upcoming elections in "core" countries like the
Netherlands, France, and Germany. The evolution of UK/EU Brexit negotiations will also be key, with
the UK aiming to start the process in the first quarter of the new year. The consequences of Italy's
rejection of the constitutional referendum will also carry into the new year, as policymakers wrestle with
stress on the banking system from the large overhang of non-performing loans, persistently low
economic growth and bank profitability, and the increasing capital gains of some banks, all while trying
to avoid forcing losses onto retail bondholders.”
— Laura Sarlo, Senior Sovereign Analyst
Emerging Markets
"Emerging markets investors should differentiate carefully in 2017 as we see both negatives and
positives looming. Stable global growth, supported by signs of improvement in the United States, would
be good for emerging markets in general. However, higher Treasury yields and a stronger US dollar
resulting from changes in US fiscal policy, could create negative sentiment for emerging markets. We
will continue to look for value in commodity stories - not just main stream copper, aluminum and oil but also zinc and tin. Country-by-country, we will also be looking closely at political reform, geopolitical
risk, world trade flows, and of course relative value. India, Indonesia, Brazil and South Africa may be of
particular interest in 2017."
— Elisabeth Colleran, Portfolio Manager, emerging markets team
Corporate Bonds
""While the election of Donald Trump has resulted in some wild repricing across markets, we continue
to remain favorable on corporate bonds for three reasons:
1. The bulk of the near-term rate rise appears complete, while the expected boost to growth and
inflation from Trump's tax and infrastructure plans will probably not occur until 2018
2. Trump's plan to allow companies to repatriate offshore funds at reduced tax rates, as well as the
likelihood that companies will operate cautiously in this uncertain environment, may result in lower
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corporate bond supply
3. Higher rates will continue to encourage investment from global investors seeking higher yields"
— Scott Service, Portfolio Manager, global fixed income team
Equities
"The prospects for corporate tax reform and infrastructure spending have brightened equity market
expectations following the US election. For the first time in quite a while, Washington could be a
source of positive earnings catalysts in the months ahead. Both large-cap and smaller cap stocks may
be poised to benefit from policy changes and this broadening of equity market leadership should be a
good thing all around."
— Richard Skaggs, Senior Equity Strategist
Interest Rates
"The recent rise in 10-year US Treasury rates of over three-quarters of a percent since the end of
September, may present opportunities in the mortgage market. I believe prices may shift from being
premium to discounted. This could offer investors like us the chance to invest in high quality, liquid
securities with attractive return profiles."
— Chris Harms, Portfolio Manager, relative return team
Russia
"In my view, the needle has moved slightly more favorably for Russia. Support for continued sanctions
against Russia is declining in the west and despite German Chancellor Merkel’s commitment to
maintaining the sanctions, she seems to be losing support across the EU, particularly in Italy and
France. Brexit has removed the UK as a strong ally to Merkel in this fight. As for the US, Presidentelect Trump has hinted at some degree of cooperation with Russia, though nothing is definitive yet."
—Darcie Sunnerberg, Senior Sovereign Analyst
Mexico
" I expect lower growth and continued weakness in the peso for 2017. President-elect Donald Trump
has brought uncertainty to emerging markets and Mexico in particular. The Mexican peso has
depreciated 10% since the US election and its recovery will depend largely on whether President-elect
Trump pushes through with tariffs on Mexican goods. Until we have clarity as to what the new
administration’s actual trade reform will look like, both domestic and foreign investments into the
country are likely to stagnate."
—Bianca Taylor, Senior Sovereign Analyst
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Liability Driven Investing
"In my view, 2016 is ending on a positive note for corporate pension plans. A rally in risk assets and a
sudden jump in long-term treasury rates in November has created a favorable outcome for pension
plans. Most will be seeing an uptick in funding ratio. This may be a big relief for pension plans
struggling with low interest rates, revision of mortality assumptions and increased Pension Benefit
Guaranty Corporation (PBGC) premiums. Looking forward to 2017, I expect to see an increased
momentum for Liability Driven Investing (LDI) strategies. Pension plans with a well-designed glide path
could be hitting de-risking triggers and increasing allocation to hedging assets, while others, still on the
sideline may be willing to jump in."
— Ankit Agarwal, Quantitative Analyst,
Bank Loans
"2016 was a strong year for the bank loan market, with returns up about 8.5% as of November 30.
With interest rates on the rise, on top of the steeper yield curve we've seen since the election, bank
loans may merit a place in a careful asset allocation plan. President-elect Trump's regulatory approach
may be somewhat favorable to loan supply in 2017, as restrictions on banks appear likely to ease,
which could also help keep bank loan default rates low."
—Cheryl Stober, Product Manager, bank loan team
US Banks
" US banks will be likely be laser focused on two things in 2017: interest rate increases and the
possibility that banking regulation will be eased under the new administration. Higher interest rates, as
well as a steeper yield curve, would likely boost net interest margins and net interest income, which is
all positive for banks. Likewise, eased regulation could reduce restrictions on areas like trading and
investing, which could also allow revenues to climb. However, bondholders like us will be cautious on
the degree of regulatory easing as too much reversal of the current requirements, that have boosted
balance sheet strength, could be a real negative for bondholders.”
—Elizabeth Schroeder, Senior Credit Analyst
European Banks
" In my view, European banks do not have quite as rosy picture ahead of them as US banks who may
benefit from higher interest rates and softer regulation under the Trump administration. Brexit is
causing uncertainty about the UK economic outlook; Italian banks are struggling to reduce their large
stock of non-performing loans; euro zone short-term interest rates are likely to stay negative; and a
series of elections next year, including in France and Germany, could pose significant risk to the
solidity of the euro zone. When investing in global banks, it might be the case that there’s no place like
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home."
— Julian Wellesley, Senior Analyst, global equity opportunities team
Technology consulting
"In my view, information technology consulting firms are grappling with tectonic shifts in their
businesses and can no longer count on successes based purely on outsourcing and other related
activities. Clients are demanding much more including digital, cloud and security services — all crucial
capabilities that Fortune 1000 companies need to successfully adapt their business models. The
information technology consulting industry is highly fragmented and I expect quite a significant
divergence between winners and losers in 2017."
— Rob Forker, Senior Global Specialist, global equity opportunities team
Telecom and cable
" I expect the new Republican administration will offer substantial regulatory relief for the telecom and
cable network operators. Already, Federal Communications Commission (FCC) proposals to share
proprietary set-top box design and reduce fees for business network services have been withdrawn.
New consumer privacy rules that just passed last month will likely be scrapped. Even more importantly,
net neutrality rules will likely be reversed allaying fears of potential broadband pricing regulation down
the road. Combined, both actions should allow the industry to reap higher returns on investment and
encourage greater spending on network infrastructure and customer premise equipment going forward.
Furthermore, judging by Trump’s appointees and transition team members so far, conditions for
industry consolidation could ease. Taken together, these developments could result in a boon for the
cable/telecom industry.
— Janet Sung, Senior Credit Research Analyst
Autos
"I expect to see growing risks to the auto market. This is the likely result of three items — escalating
spending on consumer incentives, falling used car prices, and greater use of leasing and extended
payments. However, I firmly believe the negative impact on the automakers should be mitigated by the
positive impact of huge productivity enhancements that have been implemented across the industry
over the last decade."
— Steve Bocamazo, Associate Director of Credit Research
MALR016318
This blog post is provided for informational purposes only and should not be construed as investment
advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of
the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This
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information is subject to change at any time without notice.
© Loomis, Sayles & Co.
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