For the first 100 days of 2017, Luc de la Durantaye will be wary of overvalued assets.
“We see that the fixed income market, particularly government bonds, is still fairly expensive,” he says. “From that perspective, we would be underweight the most expensive bonds.” De le Durantaye is head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
At the other end of the spectrum, some equities markets are also overvalued, he explains. U.S. equities have continued to climb, he notes, even though they’re already expensive, “relative to international markets that are more fairly priced–especially in the case of emerging markets which are fairly undervalued.”
Focusing on value and opportunity “will anchor our strategy within this highly politically uncertain environment, at least in the first 100 days,” says de la Durantaye. When looking at the U.S. and global economies, he adds, “it’s very difficult not to discuss politics for 2017.”
A geopolitical puzzle
The incoming administration in the U.S. is on everyone’s radar. And, says de la Durantaye, “we can see a lot of uncertainty [related to] the policy direction that will be taken. We could see policies that could favour growth (via tax cuts and infrastructure investment) or inflation (via tariffs and limits on immigration).”
The overall impact of these policies will depend on their “magnitude, how they’re implemented and their timing,” he adds.
The reaction of the U.S. Federal Reserve will also be a factor. “The Fed has already mentioned that any additional growth-enhancing measures—at a time where the U.S. economy is at full employment and capacity, and close to its inflation target—would potentially accelerate the [monetary policy] tightening in 2017,” says de la Durantaye.
It’s important to assess how growth and inflation are affected in the U.S. throughout the coming year, he adds, since that will provide “a sense of whether we’ll fall into more of a U.S. re-normalization scenario for 2017 or […] whether a trade war will be triggered that could lead to a global recession.”
De la Durantaye is optimistic. He favours a scenario where the U.S. continues to expand and support global growth, even though there are limits to monetary and fiscal policy.
But don’t forget Europe, he points out. “There are a lot issues around Brexit, which will add to [global] uncertainty, as will the French election. In France, some of the right-wing parties have gained in the polls and that could lead to further EU breakup.”
Further, OPEC’s implementation of oil production cutbacks will impact energy markets, and that should be monitored.