In 2017 there will be no shortage of political events with a potential to at least disrupt the global equity bull market, like the upcoming Brexit process or the German and French elections. Still, we advise investors to remain constructive and focus on setting portfolios on a robust footing by adopting a long-term asset allocation that includes alternative investments.
Our base case for this year is once again rather benign, with a mix of monetary and fiscal stimuli supporting the global economy and markets. The resulting reflationary effect should outweigh the risks of a disruptive rise in protectionism, while the hunt for yield will keep additional demand for risky investments intact despite increasing valuations. At the same time, we believe financial markets have become more fragile due to fault lines that are increasingly emerging from within, rather than the much-discussed external events.
The latter naturally receive a lot of media and analyst attention and represent the following risk factors:
Nevertheless, the following internal fault lines are generally less appreciated by investors and increasingly important in our view:
Investors should thus prepare not only for more volatility, but also for changing market patterns. With financial markets more vulnerable to dislocations, many traditional portfolios may struggle during difficult market phases, as simple diversification may fail. To achieve a truly diversified asset allocation and set up very robust portfolios, investors should:
At LGT Capital Partners, we firmly believe the endowment-like approach of the Princely Strategy represents these principles and provides a very good solution to a range of investors - beginning with a long-term strategic asset allocation that accounts for several future economic and policy developments through scenario planning. On the following page, we briefly outline our new adjusted economic and market scenarios and the resulting strategic asset allocation elements for 2017 and beyond.
Note: The next LGT Beacon will be published on 25 January 2017.