Shifting investment strategy for 2017
All major economies have seen the share of consumption in GDP figures go down since 2008. This is especially true in the Eurozone where unemployment has weighed heavily on consumption patterns. The trend is expected to start reversing in 2017.
The arguments in favour of stronger consumer sentiment is mainly supported by a jobs recovery and low oil prices. The unemployment rate in the Eurozone has been falling continuously since 2014.
And while the incidence of low fuel prices is starting to fade, current price levels are still low compared to recent levels. This has led to an increase in disposable income. A higher savings rate, an increase in disposable income, an improving housing market and general economic improvement should support consumption in the region.
Global inflation is likely to pick up mainly due the increase in the price of oil. It is estimated that Brent will reach $60 per barrel by the end of next year. The European Central Bank expects Eurozone inflation to head upwards in 2017 while this will be accompanied by an increase in bond yields.
The race to the bottom for fixed income yields appears to be all but over.
On the other side of the pond, US President-elect Donald Trump is preparing to deliver a surge of fiscal stimulus and reduce regulatory burdens on key sectors.
Trump is particularly unhappy with the large US trade deficit.
However, increasing government spending at a time when the US economy appears to be approaching full capital utilisation will only lead to an increase in imports.
To make matters worse, the expected increasing rate scenario and consequently stronger dollar will lead to imports becoming more attractive.
The Euro is thus expected to be soft in the first part of 2017. Rumours of ECB tapering in spring should help to rebalance the EUR/USD.
Environment bonds, especially long term bonds, have started to lose their shine.
Events are still volatile, giving holders some more time to consider options. High-yield bonds may offer some additional protection against interest rate movement, however, this will come at the expense of credit risk.
If current trends persist, holders tied to long-term assets would be forced into a ‘very’ prolonged period of relatively low income in order to avoid capital losses.
The alternative is diversification in the equity market. Equities offer a good hedge against inflation and historically have performed well in a rising rate scenario.
Our bias is towards European large cap equities; the benefits from a competitive exchange rate and a European economic recovery more than balance out the risks.
These arguments guide towards assets that would benefit from higher inflation, a weaker Euro and an increase in consumer spending.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.