In 2017, we face a polarized political environment. The likes of Brexit, the U.S. election result, and key upcoming votes in Europe are likely to make investors more uncertain, not less. In a recent survey, a quarter of UBS's Industry Leader Network of entrepreneur clients cited the political landscape as the biggest potential change for their business in 2017 - a greater proportion than for any other factor.
Despite localized concerns, however, the broader backdrop should be positive for investors next year. Global GDP growth should rise from 3.1 percent to 3.5 percent, driven partly by pro-growth policies in the U.S. Inflation should pick up. As in prior years, U.S. and European monetary policy should remain accommodating, while China is likely to ensure its economic slowdown remains gradual. This should benefit select U.S. and emerging market investments. Investors should also look at income-paying and alternative assets as high-grade bond returns come under pressure.
Here in more detail are UBS Wealth Management's top 10 investment ideas for 2017:
U.S. equities. Despite the post-election rally, we retain an overweight position. U.S. earnings should rise 8 percent next year, fueled by the stabilization in oil prices, accommodative monetary policy and possible fiscal stimulus.
Select equity sectors. For U.S. investors, U.S. financials and healthcare should benefit from less burdensome regulation; while U.S. tech should experience tailwinds from new areas of spending like cloud computing. For non-U.S. investors, Asia Pacific real estate investment trusts offer attractive yields relative to government bonds when compared with global averages.
Emerging market equities. Low global interest rates and stabilizing GDP growth and commodity prices should provide a continuing boost next year.
Select emerging market currencies. Depressed global rates also help make higher-yielding emerging market currencies – the South African rand, the Brazilian real, the Russian ruble, and the Indian rupee – attractive compared with developed market peers that are also sensitive to fluctuations in global growth – namely, the Australian and Canadian dollars and the Swedish krone.
Yield enhancers. For taxable U.S. investors, selective holdings in quality U.S. municipal bonds will continue to play an important role despite potential post-election tax changes. Non-U.S. investors should consider companies offering reliable incomes in the Eurozone, Japan, and Switzerland, where high-grade bond yields remain ultra-low.
U.S. senior loans. The asset class currently yields 4 percentage points more than investment-grade corporate bonds, making it attractive even if default rates rise to long-run averages.
U.S. Treasury Inflation-Protected Securities. TIPs should benefit from potential fiscal stimulus and higher wage growth, in addition to the stabilization of commodity prices.
Underweight position in nominal U.S. Treasuries. Despite the post-election dip, prices remain under threat from upward trends in inflation and rates.
Select commodity-related investments. For U.S. investors, master limited partnerships offer relatively attractive incomes and should benefit from growing oil & gas production and infrastructure development. For non-U.S. investors, precious metals palladium and platinum should be supported by a rise in industrial activity, political uncertainty and declining real rates.
Alternative investments. In 2017, returns from listed equities and bonds will probably be moderate. Select investments within hedge funds and private markets, whose returns are less correlated to listed assets, are likely to help diversify portfolios.
Finally, investors will need to consider trends and asset classes that are less affected by policy. Ongoing urbanization, technological innovation, population growth and aging are creating long-term opportunities in a number of areas, such as equity and impact investments in emerging market healthcare. If they wish to protect and grow their wealth effectively, investors should diversify broadly across regions, asset classes, and longer-term themes as well as embracing ideas that should serve them well in the year ahead.
Commentary by Mark Haefele, global chief investment officer at UBS Wealth Management, overseeing the investment strategy for $2 trillion in invested assets. F ollow him on Twitter @UBS_CIO and on LinkedIn at www.linkedin.com/in/markhaefele.
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