Global Investment Forum: Five-Year Outlook
Welcome to BMO Global Asset Management’s 5-Year Outlook 2017-2022.
Each year, our Global Investment Forum (the ‘Forum’), attended by a group of BMO’s international investment leaders and strategists, gathers for two days of intensive briefing, fact finding and debate stimulated by the input of independent experts including chief economists, investment managers and academics. Our aim is to lift our eyes from the specific focus of our ‘day jobs’ and consider the wider investment world to seek out some of the key forces that will drive markets for years to come.
We firmly believe that this era of rapid change offers opportunities as well as threats, rewards as well as risks. As global investors with responsibility for the stewardship of your capital, we are committed to sharing our investment insights and expertise with you, our clients and customers. Looking to the future, we consider a number of likely scenarios and the opportunities that they may bring to your portfolios’ allocation strategies for under- or over-emphasis across asset classes and sectors.
In this year’s Forum, our discussion identified several persistent themes and we debated the potential impact of these forces over a 5-year time frame.
- The see-saw of monetary vs. fiscal policy and the morphing of central banks into quasi-governmental roles, a potentially new paradigm
- Populism: Economic pessimism has seeped into wider society and a wave of populism and geopolitical disruption is sweeping across much of the world;
- Policy makers are searching for new gadgets in their policy toolboxes, as negative interest rates deliver mixed results and secular stagnation is becoming a mainstream theme;
- Disruptive technology as the impact of automation and robotics is felt on long-standing business models and global industries;
- Bifurcation between manufacturing versus consumer economies, altering previous assumptions of emerging versus developed markets;
- Protectionism versus globalization as broad trade agreements are being scrapped in favor of selective arrangements, closed markets and Special Economic Zones; and
- Humanitarian exposure caused by population shifts including the migrant crisis; warfare risks in South China Sea between U.S. and China; and the changing profile of the Middle East as the powerbase of who controls the world’s energy supplies fragments, and the range of viable
alternatives for oil widens (shale, LPG, non-fossil fuel, etc.).
After eight years of growth (albeit moderate), and with signs of tightness in the labor market and deterioration in productivity, the U.S. economy appears to have entered the mature phase of the business cycle. But what are the prospects from here?
Against this backdrop, we have arrived at a strong consensus regarding a baseline core scenario entitled ‘Slow and Steady Wins the Race,‘ which focuses primarily on the prospect of continued marginal incremental improvements in global economic growth (70% possibility). Our two alternative scenarios are ‘Power to the People,‘ reflecting the negative implications of populism and its associated ramifications (20% possibility); and ‘All Pulling Together,‘ in which collectivism triumphs and centralized policies are successful, stimulating global growth (10% possibility).
In the context of current global dynamics, we look to the future and consider a number of likely scenarios. This year within our Forum, we arrived at a strong consensus regarding a baseline core scenario entitled ‘Slow and Steady Wins the Race,’ which focuses on the prospect of continued marginal incremental improvements in global economic growth (70% probability). Our two alternative scenarios are ‘Power to the People,’ reflecting the negative implications of populism and its associated ramifications (20% probability); and ‘All Pulling Together,’ in which collectivism triumphs and centralized policies are successful, stimulating global growth (10% probability).
1. Slow and steady wins the race (70% probability)
‘Slow and steady wins the race,’ which focuses on the prospect of continued marginal incremental improvements in global economic growth.
2. Power to the people (20% probability)
‘Power to the people,’ reflecting the negative implications of populism and associated ramifications.
3. All pulling together (10% probability)
‘All pulling together,’ in which human nature triumphs and centralized policies are successful, stimulating global growth.
Annual scorecard: A look back at 2016
In last year’s scenario casting, we placed a 60% probability of our base case ‘Firing on more than one cylinder’ occurring over the coming years. On reflection, the key components we identified have, broadly, so far been correct, albeit with some surprises caused by the surge of populism, a key consideration in our discussions this year. Key themes continue to evolve as follows:
- Broadening of economic growth – there has been some evidence of a broader distribution of growth, though not yet to the degree that we had anticipated. The U.S. continues to lead the expansion, while Japan and Europe are showing some signs of improvements.
- Decline in energy prices – we saw this as being a significant tailwind for a number of energy-consuming countries. However, not everybody benefited as responses differed regionally. In the face of lower oil prices, the U.S. consumer acted unexpectedly, continuing to save and not spend, as seen in improving personal balance sheets. Also, the initial impact of lower energy-related capital expenditure had an immediately negative impact that was not offset by a typical U.S. consumer-led response to lower energy costs. Europe saw some expansion in consumer numbers, although in China, the benefits did not flow down to the consumer but stayed up at the state level.
- Debt overhang as a headwind – this remains the case, particularly where there is a high sovereign debt to GDP ratio and it continues to be a drag on growth potential. However, it is important to note that, consistent with our view coming out of our 2015 Forum, elevated debt levels remain a concern, but that there is a broader consensus that debt levels are sustainable for the foreseeable future, barring an unanticipated spike in interest rates.
- For the U.S., we were calling for robust job gains and we got that spot on. We also thought housing prices would stay firm, and they picked up a little over the course of the year.
- In Asia, China has proven its ability to continue to grow and contain a crisis; GDP growth has slowed but without the hard landing many feared. We were right to highlight India as the BRIC nation that would disappoint the least.
- Europe lower for longer – this has broadly been the case, although the shocking UK referendum decision was not anticipated and the long-term disruption remains unknown.
Listen to our Better Conversations podcast episode featuring Jon Adams, a Senior Investment Strategist on BMO’s Multi-Asset Solutions team, who participated in this year’s forum.
If we look at what we said regarding asset allocations, we suggested under-emphasizing Canadian equities until the oil price was firm. Subsequently, we increased our Canadian equity rating late last year because we felt that oil prices had at last bottomed, moving into a position of over-emphasis. So we got that one correct too. Last October, we rightly suggested over-emphasizing the following sectors: consumer discretionary, IT and industrials. Additionally, we recommended an overweight in India, where equities have done better than in some developed markets. However, under-emphasizing precious metals was not the right call in the last 12 months, and energy has been stronger than expected in the Canadian market.
On currencies, we predicted that the U.S. dollar was to be overemphasized and it has strengthened overall. The U.S. dollar has had a volatile time, however, rising a little against the euro but weakening versus the yen.