However, investors shouldn’t become overly optimistic. Most of the benefits to any infrastructure program will occur after 2017. They may also be limited by fiscal pressure coming from Congress, or provide only a short-term boost if not designed to improve long-term productivity. Lower personal tax rates should increase consumption but will also be constrained by deficit hawks. Lower corporate tax rates and discounted repatriation of foreign earnings should bolster capital expenditures, but these cuts may be partially offset by repealing other corporate deductions.
Activity in Europe picking up
Outside the U.S., growth is also beginning to slowly pick up steam. Activity measures across continental Europe are improving, while the UK has yet to feel any significant economic pain from the Brexit vote (with the emphasis on “yet”). After stumbling a bit, growth in China appears to have stabilized for the near term while policymakers wrestle with the trade-offs between economic reform and excessive credit expansion.
Better growth prospects for China and EM
China’s stabilization has in turn heightened growth prospects for emerging markets in general, compounded by the rebound in commodity prices. While the overall outlook for growth globally is improving, the underlying supply-side constraints remain in place. These include economies saddled with excessive debt, poor labor demographics, and stagnant productivity. Most importantly, stronger growth is likely to come with increased inflationary pressure which will put central banks on greater notice. Too much inflation could push up nominal rates further out the yield curve while policy accommodation wanes at the short end. The macro landscape is set to improve, but investors should expect the “Trump Train” to pull out of the station very slowly.
Modestly stronger global growth should create improving fundamentals for risk assets like stocks and corporate bonds of all types. These improving fundamentals will only partially translate into higher prices, as valuation has become more of a headwind in these sectors. High-quality sovereign and agency debt will remain under pressure, although we believe bond yields will rise only modestly. The U.S. dollar may strengthen, but less than current consensus, as the 30% jump in the greenback since mid-’14 already reflects the known policy divergence of central banks.
Geopolitical risks are looming
While we expect modest improvement in the global economy and reasonable (if unspectacular) returns for risk assets, this belies an even larger shift in geopolitical and market risks. The new and inexperienced Trump administration will be tested on multiple fronts including Russia and China. Brexit negotiations are shaping up to be ugly while elections in France and Germany will test the long-term viability of the euro zone. Syria and Turkey remained mired in crisis. Investors would be wise to recognize that short-term volatility often overpowers improving fundamentals. This burgeoning uncertainty represents an opportunity for true long-term investors, but is likely to cause heartache for the more risk-averse.
David Lafferty is Senior Vice President and Chief Market Strategist for Natixis Global Asset Management, U.S. Distribution, where he heads up the Investment Strategies Group.
His team is responsible for assessing capital market trends and supporting affiliated portfolio management teams. He has been with Natixis since 2004. Previously, he was senior vice president responsible for fixed-income and asset allocation products with State Street Research and a senior investment strategist at MetLife. Mr. Lafferty received a BA from the University of New Hampshire and an MS in finance from Suffolk University. He is a member of the Boston Security Analyst Society and is a CFA® charterholder.
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