Populism Just One of Many Market Forces in 2017

Investment managers are assessing how social forces such as populism and a desire in many industries for less regulation could impact global growth and portfolio performance. 

By John Manganaro | December 16, 2016
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Goldman Sachs Asset Management (GSAM) is out with one of its first 2017 market analyses, arguing that “the long post-crisis economic recovery” is likely to continue during the year to come.

“As a base case, we think growth is poised to broaden out to more countries, with the global economy drawing on more sources of strength than at any point since 2010,” the analysis contends.

Yet there are clearly points of concern and uncertainty in global markets—as well as in the U.S.

“In some respects, our outlook represents an extension of the same long cycle we envisioned heading into 2016,” researchers explain. “The key difference for 2017 revolves around four emerging transitions. Populism is challenging globalism and creating new tail risks. Concerns about low growth are giving way to concerns about inflation. Years of focus on monetary policy are giving way to a close watch over fiscal policy. And concerns about new regulation are acceding to hopes for de-regulation.”

From an investment perspective, GSAM researchers are broadly supportive of utilizing risk assets in 2017.

“We prefer equities over credit and credit over rates, but we expect low returns from these traditional exposures given 1) elevated valuations, 2) limited upside for corporate earnings from current levels and 3) limits to economic growth potential,” the analysis projects. “Broadening exposure beyond conventional stocks and bonds, identifying opportunities in emerging markets and deploying more dynamic asset allocation strategies are some ways to adapt.”

The analysis goes on to propose several key questions institutional investors should consider in shaping their approach to markets next year.

“Is it time to de-risk?” they ask. “No. We think de-risking would be premature, at least from a purely return-generating standpoint. We expect the macro environment to remain supportive of risk assets during 2017 amid a slow-but-steady expansion in developed markets and an acceleration of growth in some emerging markets … We believe the concerns about the developed world being mired in a pattern of underinvestment and stalled growth—so-called secular stagnation—are overdone.”

According to GSAM, the transition to populism in key markets will be an evolving theme in 2017, and one that all sorts of investors should watch carefully. 

“We will be closely monitoring the strength of the populist trend given its potential to impact Europe even further and the increased likelihood of more protectionist trade policies,” GSAM notes. “The first 100 days of the Trump administration will be critical for assessing policy details and priorities, from tax rates to trade agreements.”

The full GSAM analysis is available for download here

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