MR. RON INSANA: Hello everyone.
I'm Ron Insana and welcome to this conversation about what we might expect in 2017.
In many ways, 2016 was a year of the unexpected.
In June, we had Brexit with Brits voting to leave the European Union and had an even bigger
surprise in November when voters in the United States elected Donald Trump to the White House,
and gave republicans a majority in both the House and the Senate.
Now, the markets in 2016 were also anything but predictable.
Oil prices plummeted early on, but rebounded sharply as the year progressed, and in the
bond market, the yield on U.S. Treasuries reached historic lows in the summer, but turned
the corner higher in what could be the end of the longest bull market in bonds in history,
one that lasted some 35 years.
U.S. equities were volatile for much of the year only to rally into record territory by
year's end.
Now, these events and many others like them will have a pronounced effect on the financial
markets and the economy in 2017.
So, will the coming year bring more unexpected surprises, and if so how can investors make
sense of these events and stay focused on the long-term opportunities?
Joining me now to answer these questions and share their insights are:
* Chris Hyzy, Chief Investment Officer for Bank of America Global Wealth Management and
Investment
* Karin Kimbrough, Head of Investment Strategy at Merrill Lynch Wealth Management
* And Mary Ann Bartels, Head of Portfolio Strategy, also at Merrill Lynch Wealth Management.
Welcome to you all, and Chris, if I could start with you.
Given all the surprises of 2016, what are your thoughts of where clients should be focused
in the coming year?
CHRIS HYZY: Well, in 2017, it's certainly not simple, but when you look back at 2016,
you saw a tale of two halves.
In the first half, it was more about low volatility, more defensive positioning.
You had the elections coming, obviously coming in the middle of the year, Brexit, etc.
You had a lot of political consternation going on around the world.
So, that defensive positioning occurred at all institutional levels, all private client
levels, etc.
In the second half of the year, after rates bottomed around June or July, you started
to see the economy turn itself around a little bit, largely speaking because we had stability
in the dollar, and we had things like manufacturing, industrial production, what drives the parts
of the economy that were big drags, those were starting to pro-cyclical move.
And then the election hits, and then it becomes all about what pro-growth policies are going
to be put in place this year in 2017, and that sentiment has changed drastically.
So we put all this together, we're going from secular stagnation, an era of secular stagnation,
which could have carried on for quite some time, low, low inflation, low bond yields,
low growth, to an area of potential fiscal inflation where you get higher nominal growth,
higher yields.
That's the good side.
The bad side is potentially higher volatility, and we have to position portfolios to get
ready for that and it should come in waves over the course of not just the next year,
over the next couple of years.
RON: Do you think the Trump Administration will pass tax cuts, tax reform, deregulation
efforts, infrastructure, and increase military spending all at the same time?
CHRIS HYZY: I think the talk will be there throughout a lot of the first 100 days and
throughout all of 2017 and into '18.
The key is the convergence of any of that should lead to a higher growth path.
We should see higher nominal growth on top of what happened in '16 when we were starting
to gain some momentum.
And if that convergence happens, it's most likely 2018 will see most of it, but portfolios
are already repositioning for that, fast tracking a lot of that, and that that takes time.
So, we'll see that throughout all of 2017, and our view is, it's pretty simple.
That's overweight equities, underweight fixed income in the construct of an overall portfolio
and then within that get more cyclical, more value, more exposure to things like small
caps.
RON: Karin, let me ask you about bonds.
If indeed we're going to see faster growth, if we're going to see potentially slightly
higher inflation and the bond market continues to do what it did in late 2016 which is to
sell off, do individual investors want to own bonds here knowing that the Federal Reserve
may have to accelerate the pace of rate hikes?
KARIN KIMBROUGH: So, we do think that the Fed is likely to have to accelerate here in
2017 from the pace that they had in 2015 and '16, which was just one hike per year.
The Fed themselves have projected that they'll do probably three hikes per year going forward.
But that said, it doesn't mean that the investor needs to kind of throw their hands up and
get completely out of the fixed income market.
You might want to consider what parts of the fixed income market are more attractive.
And you do have to be prepared for the fact that there will be more volatility as we continue
through with this move from what was a sort of secular stagnation to a fiscal reflationary
path that we're on.
The cyclical reflation is going to create opportunities of time when we might see certain
parts of the bond market actually do better.
So, certain things have maybe sold off too much and there might be opportunities.
Think about how poorly Munis have done at the end of 2016.
There may be scope as we get more clarity around the tax picture for people to reevaluate
whether they want to kind of treat it as a buying opportunity.
Also, think about the fact that high yield seems to have lagged a little bit.
Now, we're not exactly trying to say that we're overweight in any of these sectors,
but there may be opportunities as we see cyclical reflationary stories play through and earnings
come up higher that that will actually be supportive of certain parts of the corporate
bond market.
RON: Chris, with respect to the bond market though, experts have been calling for something
known as the great rotation that eventually people who have just loaded up their portfolios
with bonds are going to take that money out and put it into stocks.
We've obviously seen some of that, but are we going to go back to an environment where
we see a lot of that?
CHRIS HYZY: It's going to feel like a lot of it, but on the margin is really where it
happens, and there's a lot of money in the world, and across all different types of investor
segments.
Just moving 1%, 2%, 3% in your long-term asset allocation and bringing it forward has a powerful
effect, and that investor flows can themselves take yields to places that we haven't seen
recently.
So, we have to watch that very closely.
Investor flows and sentiment are very important.
And right now most of the growth that we expect will be on the equity side of the equation
versus what we've seen for the better part of almost three decades, which is principal
going up and income together in a bond and a bond bull market and Karin's very right.
It's about the tradeoff within fixed income.
If you're overexposed to the areas that are going to be more pressured through the yields
backing up or going higher, then that switch has to be is it Treasuries or is it Munis.
And right now Munis have a better valuation, a better discount versus Treasuries than we've
seen in quite some time.
And you may also have to go down in duration to areas of the credit spectrum, like investment-grade
bonds, to build the barbell.
RON: Shorter term.
CHRIS HYZY: Shorter term
MR. INSANA: Alright, so Mary Ann, let's go global then.
Are we getting market signals, broadly speaking, that the world is accelerating growth and
normalizing to a certain extent?
And what does that mean for stock market valuations for the technical and what the charts look
like at this time?
MS. MARY ANN BARTELS: Well Ron, we really are getting global synchronized readings, and
the best model to actually look at is the Global Wave that's put out by Bank of America
Merrill Lynch quant team, and that model actually went bullish, went positive in June after
18 months of actually having a poor reading.
And that was prior, just prior to Brexit.
MR. INSANA: And that actually caught the bottom.
MS. BARTELS: That caught the bottom.
And so far, economic data globally has continued to improve; the outlook looks pretty darn
good.
I think what's important for investors to keep in mind is that the trend remains positive,
and going into 2017 with a new elected president, the policies there look very much pro-growth,
pro-cyclical, and that's exactly how the market is responding.
RON: Alright, I want to go around the table right now, and Mary Ann, I'll start with you,
leaving our viewers with one key takeaway for the coming year, what would that be?
MARY ANN BARTELS: Own value, and value is banks and energy.
And I think the biggest surprise that's come out of this is how violent the move has been
with banks to the upside.
RON: - - 28% since the election.
MARY ANN BARTELS: Correct, and what I want to leave you with, it's only the first inning.
RON: Okay.
KAREN KIMBROUGH: Stay positive on real growth.
It is here.
It was here.
It is still here.
It is still coming.
2017 should be good.
RON: - - one could argue that the economy was accelerating going into the Trump election,
correct?
KAREN KIMBROUGH: That is exactly how we see it.
We see that this improvement came up before the election, but the election kind of just
propelled it forward faster, right, so- RON: Chris?
CHRIS HYZY: We haven't seen a great rotation in a long time.
The great rotation is on.
It's going to take a lot longer than people expect.
RON: That means out of bonds and into stocks?
CHRIS HYZY: The point here is to maintain balance but add to the areas that are more
cyclically induced and make sure that rotation happens prescriptively over the course of
next year.
RON: Thank you, Mary Ann, Karin, Chris, for joining us here today and sharing your insights
for 2017.
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