The outlook is contained in a 17-odd page document
These are the main points ...
We expect U.S.-led reflation − rising nominal growth, wages and inflation − to accelerate, and see fiscal expansion gradually replacing monetary policy as an economic growth and market driver around the world. We discussed this, as well as the impact of technological change, the risk of a China credit bubble and the dynamics of investor risk appetite, at our semi-annual Outlook Forum. Our key views:
• Reflation implications: We see reflation taking root and believe global bond yields have bottomed. As a result, we prefer equities over fixed income and credit over government bonds. We see higher yields and steeper curves, and favor short- over long-duration bonds and value shares over bond-like equities.
• Low returns ahead: Structural factors such as aging societies and weak productivity growth have led to a drop in economic growth potential. We see these factors limiting how high real yields can go and see rewards for taking risk in equities, emerging market (EM) assets and alternatives in private markets.
• Dispersion: We see the gap between equity winners and losers widening. A more unstable relationship between bonds and equities signals a regime change that challenges traditional diversification.
• Risks: Political and policy risks abound. There is uncertainty about U.S. President-elect Donald Trump's agenda, its implementation and the timing. French and German elections will test Europe's cohesion amid a forest fire of populism around the world. China's capital outflows and falling yuan are worries.
• Markets: We see developed market equities moving higher in 2017 and prefer dividend growers, financials and health care. We like Japanese and EM equities but see potential trade tensions as a risk. In fixed income, we favor high-quality credit and inflation-linked securities over nominal bonds.
