The global uncertainty principle and why investors should care…

The basic assumption by markets at the moment is that President Trump and the Republican administration will engage in fiscal stimulus. The question to ask is whether that fiscal stimulus is successful or whether it will end in failure. If it is successful then perhaps it will lead to US dollar strength and growth both in the US and the rest of the world and perhaps even a normalisation of the US Treasury curve. If it doesn’t succeed, as many people expect, then likely there will be a reversal of market expectations, an increase in policy uncertainty and perhaps a lower growth profile than currently priced in. These two routes have very different outcomes for the prospects of emerging market fixed income and equity markets.

There are some variables around this. First, think about President Trump and his tweets: they generate a significant amount of headline risk as we have seen already in the early weeks of his administration. That in turn creates uncertainty and perhaps a higher risk premium for some of the emerging markets such as China and Mexico and even for developed markets like Europe. It is too early to tell the result of this rhetoric but there is definitely a whiff of protectionism in the air.

The other variable is whether the Republicans in control of Congress have a high enough tolerance to increase the deficit in order to engage in this type of fiscal stimulus, which is not particularly clear to us at this point. Putting all this together, we believe the level of uncertainty in markets is going to fluctuate a lot over the next few months.

Colm McDonagh – Insight, a BNY Mellon company

The basic assumption by markets at the moment is that President Trump and the Republican administration will engage in fiscal stimulus. The question to ask is whether that fiscal stimulus is successful or whether it will end in failure. If it is successful then perhaps it will lead to US dollar strength and growth both in the US and the … read more

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Beware the bond market mirror

Last year, we saw government bonds rally and then fall, while high-yield bonds struggled and then rallied. It looks like this year we could see a similar pattern but in reverse.

The stronger economic growth momentum and rising inflation statistics are the driving force for higher government bond yields. In addition, a number of President Trump’s pledges such as pro-business policies and infrastructure spending could be positive for the economy, leading to higher growth and inflation – a bearish environment for bonds.

However, his more controversial campaign promises, including protectionist trade policies and an immigration clampdown, could lead to a flight to safety – a boost for bonds perceived as ‘safe-havens’. We are concerned that risk markets are currently complacent about this uncertainty, with investors seemingly buying into the good news rather than taking account of any potential problems.

Paul Brain – Newton, a BNY Mellon company

Last year, we saw government bonds rally and then fall, while high-yield bonds struggled and then rallied. It looks like this year we could see a similar pattern but in reverse. The stronger economic growth momentum and rising inflation statistics are the driving force for higher government bond yields. In addition, a number of President Trump’s pledges such as pro-business … read more

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Heavy weather for BoE inflation forecasts?

Market pricing would suggest investors are anticipating a prolonged period in which inflation overshoots the Bank of England’s (BoE) inflation target. The BoE asserts any pickup in inflation is likely to be temporary. As market expectations and official inflation forecasts fall further out of sync, the reality that emerges will have significant implications for holders of nominal and inflation-linked bonds alike.

The BoE’s rate-setting committee, the Monetary Policy Committee (MPC), has been reluctant to increase official rates in the face of higher inflation, owing to what it considers to be temporary factors. And, for now, it can point to public expectations for UK inflation being relatively well contained. This is reminiscent of 2011, when the BoE “looked through” price rises at a time when commodity prices were soaring and value-added tax was being increased. Inflation, as measured by the consumer price index, peaked above 5% that year.

Holders of nominal bonds need to be certain that the current increase in inflation is being driven by temporary factors, as the MPC asserts. If the BoE’s assessment is flawed, its commitment to low inflation will be questioned for the second time in recent history. This would arguably have serious implications for holders of nominal bonds, more so than owners of inflation-linked assets.

David Hooker – Insight, a BNY Mellon company

Market pricing would suggest investors are anticipating a prolonged period in which inflation overshoots the Bank of England’s (BoE) inflation target. The BoE asserts any pickup in inflation is likely to be temporary. As market expectations and official inflation forecasts fall further out of sync, the reality that emerges will have significant implications for holders of nominal and inflation-linked bonds … read more

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Private equity: At the peak?

For yield-hungry investors, private equity has been one of the more attractive asset classes in recent years and it is unlikely to lose its appeal given the lower returns expected from more traditional investments over the coming year.

However, 2017 may offer some challenges. There are signs private equity may be near the top of the cycle: with valuations some consider stretched, deteriorating credit conditions and private equity firms struggling to put un-invested cash to work.

Although we expect private equity to continue to outperform public equity markets on a relative basis, investors may need to be more discerning – looking at more contrarian strategies: special situations, more illiquid strategies and those that are geographically diverse.

For investors who have so far focused on developed markets, the emerging markets could be a potential hunting ground. Private equity opportunities in emerging markets tend to be much less leveraged, operate in higher growth environments and valuations tend to be lower than in the public markets, meaning they do not look, in our opinion, as stretched as those in the US and Europe. Many businesses have also evolved over the past decade to be formidable competitors on the global stage.

Ralph Jaeger – Siguler Guff, a BNY Mellon company

For yield-hungry investors, private equity has been one of the more attractive asset classes in recent years and it is unlikely to lose its appeal given the lower returns expected from more traditional investments over the coming year. However, 2017 may offer some challenges. There are signs private equity may be near the top of the cycle: with valuations some … read more

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