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Investors will see the ‘winds of change’ in 2017. They will have reasons for optimism while facing new risks related to Trump, says Robeco’s Lukas Daalder.
He says the consensus of market watchers is that more positivity than negativity can be expected from rising global growth, the emergence of reflation and a shift from monetary to fiscal stimulus, along with reactions either way to whatever incoming US President Donald Trump actual does.
“As has become a bit of a New Year’s tradition, we will not take a look at what we think 2017 will bring us, but rather by looking at what the consensus thinks is in store,” says Daalder, Chief Investment Officer of Robeco Investment Solutions. “We think the importance of the consensus is in general under-appreciated, and it remains the benchmark from which developments are assessed. If you look at the monthly US payrolls report for example, financial markets will not necessarily react to the absolute level of the number of jobs reported, but rather to how much it deviates from what the market expected.”
“This is also the reason why we tend to give this much attention to the Citi surprise indices: it is the unexpected that moves the markets. Knowing what is expected is therefore a basic starting point from which to see where the biggest risks and surprises may come from.”
So what does the consensus believe, and how may reality deviate from it? “The optimism is linked to the potential for growth acceleration in the world economy, while the risks are almost entirely linked to the unpredictable nature of the new US President,” Daalder says.
“As for the growth outlook, the central question is whether 2017 will be the year in which the authorities are able to revive the economy, to boost growth, and with it, inflation. ‘Reflation’ is the buzzword, and most agree that there will be a shift from monetary to fiscal stimulus.”
He says the main things to come out from consensus views are:
For growth expectations, Daalder says the picture is mixed. “The consensus has the highest relative expectations for Japan, with most forecasting growth in excess of the average growth realization of the past three years,” he says. “Having said that, that average is pretty low (0.8%), which makes it an easy target to break.”
“The picture for the US is pretty mixed, with the average expected growth rate (2.1%) actually slightly below the realization growth rate (2.2%). Interestingly, even those who appear to be pretty upbeat with respect to the Trump plans shy away from putting it into a higher growth estimate. As for Europe, the consensus is unanimously cautious, with no-one forecasting growth in excess of 1.5%.”
When compared with estimates for inflation, the overall outlook is less clear, Daalder says. The consensus currently predicts 2.3% for the US and 1.3% for the Eurozone. “Although some of the reports are pretty upbeat on the prospects for reflation taking place in 2017 (especially for the US), this has so far failed to lead to a more optimistic growth outlook,” he says.
“All in all, there appears to be a bigger belief in the return of inflation than there is in the return of growth. Although this supports the developments that we have seen in the bond markets, there appears to be something of a mismatch between what stock markets have done and the consensus growth numbers.”
“Either stocks have already overshot their mark, or the top-down consensus is still pretty conservative with respect to growth expectations. A bigger risk seems to be the clear lack of attention that is being given to the potential negative impact of de-globalization: the assumption that common sense will prevail is one that we find hard, given the character of Trump.”
Daalder says another recurring message is that the outlook for stocks will crucially depend on corporate earnings for the year to come, after hitting records at the end of 2016.
“Numerous reports have made the observation that the mismatch between earnings growth, which have been mostly negative across the globe in recent years, and equity returns, which have been mostly positive, has meant that stocks have become more expensive in PE terms (the so-called multiple expansion).”
“Looking at the MSCI World Index for example, reported earnings per share have declined by 3% over the last six years, while the index itself has risen by 37%. Corporate earnings are therefore deemed to be of crucial importance for this market to move higher.”