It is that time of year where the pundits (economists, analysts, advisors and journalists) all have to make thier predictions for 2017.
At the same time, we at High Rock (portfolio managers) are busy trying to determine what our key investing themes will be for 2017.
For 2016, our key theme: that uncertainty would create greater levels of volatility channelled our focus on non-correlated assets and tactical trading. Slower than expected economic growth and deflationary pressures in the first half of the year, followed by Brexit and the Trump election in the second half, helped to reinforce that theme and financial markets found themselves providing lots of big swings in price. Protecting our clients from these swings and taking advantage of low prices in times of high volatility were key in helping us to come out well ahead of our combined benchmark indexes over the course of the year.
As a result our clients (and ourselves, because we invest in the same asset models as our clients) have been rewarded with excellent risk-adjusted returns and above average portfolio growth (a great deal of our performance did come from our taking advantage of the volatility in the first half of the year) over the course of the entire year.
As we ponder our key themes for 2017, we are watching financial markets build in a lot of positive economic and earnings growth based on the election promises of Donald Trump.
So one important theme (coming to the forefront) is one of reflation: whereby bond investors are demanding higher yields to protect themselves from higher future inflation. This is something that central banks have been working hard to achieve with extraordinarily easy monetary policy, but had basically been unsuccessful at achieving until Donald Trump was voted in as the next president of the United States.
He was able to apparently convince (sell) financial markets on his proposed agenda that he would, with lower taxes and big spending, be able to propel economic growth (and inflation) forward. He is obviously a very good salesman.
Caveat Emptor: (buyer beware) he has made some pretty big promises in his past as well.
There is going to be a big gap (of time) between the initiation of all his promises, the implementation of them and the end results and there will be plenty of water to flow under the bridge in the meantime (something that financial markets appear to be taking for granted).
So, financial markets and maket particiapnts, at this moment seem to be fairly convinced. I have to admit (if you have not already figured it out) that I am rather skeptical (if not out-rightly cynical).
Perhaps see this article as a reference point:
Oddly enough, I have always been more of an optimist (than a pessimist), but there is something that just does not sit right with me about all of this (too many close encounters with slick salespeople and manipulative personalities in my time as a Branch Manager in the investment industry, perhaps).
Sometimes (and it is pure human nature that does it) we just get caught wanting to believe. I hope that it all comes true, but I still think that we need to stay cautious.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist