Global Opportunities and Potential Pullbacks
The Raymond James Investment Strategy Committee discusses current market trends, economic conditions, and international influences for investors to consider.
Each quarter, the Raymond James Investment Strategy Committee completes a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications covered in this quarter’s Investment Strategy Quarterly. Read commentary from the committee meeting held June 7, 2017 below, or download the entire publication for a more thorough view of the markets and the economy.
Major macro factors affecting the economy and financial markets over the next six to 12 months include earnings growth, Federal Reserve policy, economic growth and U.S. political uncertainty.
The majority of the committee is neutral (1.5 - 2.0%) to somewhat positive (2.1 – 2.5%) on real U.S. GDP growth over the next six to 12 months. Inflation is estimated to remain about the same at 1.5% for the same timeframe.
- “It looks like the big rebound in growth that we anticipated in Q2 is going to be a bit softer than we thought, particularly in consumer spending. It’s still going to be stronger than in the first quarter, but not by a lot.”
- “Tax reform is difficult, but Washington is still likely to lower tax rates. Even if we were to get the full Trump agenda, the job market will be a binding constraint on the pace of economic growth.”
- “Nonfarm payroll figures bounce around from month to month, but there is a clear downtrend over the last couple of years. We’ve also had four consecutive monthly declines in retail employment, which is worrisome, but the unemployment rate continues to fall.”
- “In June, the Federal Reserve (Fed) will raise the target range to 1 - 1.25%. With the 2-year Treasury yielding 1.31%, the market doesn’t seem to expect many more rate hikes beyond that – a contrast to the Fed’s outlook.”
- “The Fed is expected to start unwinding its balance sheet by yearend, but should begin cautiously and I think the markets should be okay with that.”
– Scott J. Brown, Ph.D., Chief Economist, Equity Research
There was a significant increase in the bullishness of the committee towards foreign equities this quarter. 89% are neutral to bullish towards non-U.S. developed equities and 81% are neutral to bullish towards emerging market equities over the next six to 12 months.
- “Brexit is a multi-year event. Increasingly, it looks like a three-to-five year time horizon for the legislation to be completed. Although there is currently a two-year window for negotiations, there is increased talk of transitional arrangements driven by the perspective that Brexit will be delayed. More importantly is what’s going to happen with ongoing economic reform.”
- “The biggest wildcards for 2018 will be the results and impact of the German elections (held in late September 2017), the progress in reforms and if Brexit negotiators will be pragmatic.”
- “In France, President Macron has all the building blocks required to start making some changes, albeit slowly. Although there are questions around his ability to implement the changes he is proposing, the circumstances are the best they’ve been for many years now.”
- “There is a bit of momentum with positive earnings growth and money inflows to the European financial markets, which has been pushing the euro up and giving people some faith. If you are thinking about allocating to Europe, it still makes sense.”
- “China’s Belt and Road initiative is about more than economic growth. It’s about trade and diplomacy. It’s an old trade route reconfigured for the modern day world. People have noted some similarities to the Marshall Plan of the post-World War II era in terms of the size, scale and potential diplomatic influence – it’s something to watch.”
– Chris Bailey, European Strategist, Raymond James Euro Equities*
The majority of the committee is neutral to bullish on U.S. equities over the next six to 12 months, a little lower than in the recent past. More than 80% of the committee thinks there is a good chance for a pullback in that same timeframe.
- “We still think it’s a bull market. There’s a relatively high floor to how low stocks could go.”
- “We’ve had the best pace in earnings growth since 2011, and the market has responded very well to that. The market still seems to be shrugging off all political issues, and it’s more focused on earnings despite softening economic growth.”
- “Technology is expected to be one of the best areas for growth over the next few years; however, it’s currently overbought and overextended. The dips are still for buying, for technology and the market as a whole.”
- “It’s all about earnings until proven otherwise.”
– Andrew Adams, CMT, Senior Research Associate, Equity Research
Twelve months from now, the majority of the committee thinks that rates on the 10-year Treasury will be moderately higher.
- “Demographics are going to play a huge role over the next 10 to 15 years as baby boomers go through the natural progression of shifting from heavily allocated risk-based assets to safer, higher credit quality, income-producing assets.”
- “An effective strategy to buffer against an equity market pullback or recession could be long duration, high credit quality, fixed income assets.”
- “The Treasury curve has been flattening since 2014 and the runway is getting short for the Federal Reserve. The bond market continues to tell us that what’s going on in the markets is relatively uncertain.”
– Nick Goetze, Managing Director, Fixed Income Services
- “Last quarter, municipal bonds were cheap and they’ve rallied considerably, although there’s not a lot of supply. Munis have shown the resiliency that we’ve come to expect out of them, which is encouraging and reinforces slow, steady, low inflation.”
– Benjamin Streed, CFA, Strategist, Fixed Income
- “The bond world is focused on the Federal Reserve. The global balance sheets are still expanding, so you’ve got room to run in Treasuries.”
– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management*
The U.S. market for credit continues to attract large flows from institutions and individuals. Record tax receipts at the state levels and pension underfunding are adding to demand in an already yield-starved environment.
- “It’s hard to be bearish on equities when the credit markets are giving away money. It’s just that simple.”
- “The new issue bond market is frequently oversubscribed. Spreads move in from initial price talk and tighten after issuance.”
- “It is an uncomfortable calm, and low interest rates have modified behavior of issuers and investors. The bull market for risk assets is, at least in part, being enabled by the credit markets. Until this appetite is satiated, risk assets will benefit and low volatility will persist.”
- “At least from the credit side of the ledger, stability is inherently unstable.”
– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management
Energy and Oil
On the whole, commodities have been fairly soft. Energy is part of that trade, not exclusively oil. Oil demand is relatively healthy, growing at about 1% per year.
- “We have been frustrated and perplexed by the disconnect between the fundamentals of the oil market and current price levels. A classic example is oil falling 5% in response to OPEC’s recent news of extending production curtailments.”
- “To grow the global oil supply 1% per year, the current level of drilling activity isn’t enough. Prices will have to rise to enable the industry to get to a more sustainable level of investment. Over the next three to six months, as the inventory data becomes more durable, that should happen.”
- “Despite all the hype over President Trump’s announcement to pull out of the Paris agreement, the actual trend of lower carbon emissions and changes in the production and consumption of energy is going to continue – in the U.S. and countries that have stayed under the Paris framework.”
- “Even more influential is the change in the economics of electricity generation. Natural gas is gaining share, and wind and solar are gaining share at an even faster rate.”
– Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
In 1Q 2017, industry net outflows, driven by the challenging environment for alternative investments when compared to equity market performance, slowed to the lowest level in five quarters.
- “The majority of the hedge fund industry inflows (within private hedge funds) went to global macro and event driven hedge funds. I think people are realizing that dislocations are occurring across the global market environment.”
- “Mainly, we are seeing continued interest in private equity, and a lot of that has to do with the return-enhancing properties of those strategies.”
– Jennifer Suden, CAIA, Director of Alternative Investments Research, PCG Investment Products
Valuations across all asset classes continue to grind higher. In the equity space, multiples are creeping up, and, in the credit space, spreads continue to narrow.
- “For implementations where we can own alternatives, we remain underweight equity. Within alternatives, we support trend-following strategies to help meet downside risk targets and protect against higher drawdowns. We remain neutral to emerging markets.”
- “Within fixed income, our views continue to evolve. We remain underweight duration but want to continue to chip away at that underweight going forward.”
- Kevin Pate, CAIA, Vice President, Asset Management Services
*An affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance that any forecasts will occur. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The market value of bonds may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. Asset allocation and diversification do not guarantee a profit nor protect against loss. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.