Market Perspectives: Five-Year Outlook

Perfect policy prevails (10% probability)

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In this, our upside scenario, we look at what happens when the policies all go according to plan. However, given the number of possible factors at play, we are mindful that this is a low likelihood and have given it a 10% probability, for the optimists among us.

Policymakers get it right

Our upside scenario: Perfect policy prevails

With synchronized global growth already driving markets higher, the potential for positive political surprises could reward investors even more.
 
Listen to the full episode here.

First up, we assume in this scenario that central banks are successful at bringing their economies back to full employment smoothly and without pushing up inflation. Balance sheets and interest rates are normalized without undue hiccups and markets continue to advance undisturbed.

Trump triumphs

In this scenario, we anticipate that President Trump gets it right for the U.S. We anticipate that his tax reform bill (the first major reform since 1986), which proposes a meaningful reduction in U.S. corporate tax and simplifies the income tax structure, is successful in delivering the promise of jobs and economic growth.

We also anticipate that the reform measures being proposed by President Xi in China and Prime Minister Abe in Japan are all successful at stimulating their local economies – covered in more detail in our base case scenario.

We consider the need for governments to deliver changes with fiscal measures rather than relying on central bank monetary measures to add stimulus. This can be achieved by investments in infrastructure, which boost supply as well as demand and relieve bottlenecks in the process. One such example is in China, where there is heavy state investment which is feeding the construction industry. We anticipate in this scenario that this in turn stimulates production and trade picks up.

perfect policy prevails chart 15

Robots take the strain

A key outcome of this scenario is that global capital expenditure rises, enabling productivity to go up and be sustained. However, given the context of our aging baby boomers, we believe that to deliver on this we will see a step-change in the integration into the workplace of software automation and artificial intelligence systems, if not robots as such at this stage. The efficient implementation of systems will help bridge the gap in the labor force, without disenfranchising the low-paid workers, who will be more easily able to transition into skilled roles with the help of the new systems in place.

One other beneficiary of the rise in global capital expenditure will be emerging markets, who we believe would be drawn into a bull market, interestingly due to a domestic rally and not as a result of exports.

Talk not action

And finally, we believe diplomacy wins the day and all the talking would occur behind closed doors, enabling agreements to be reached and deals to be struck without the escalation to warfare.

 

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Better conversations. Better outcomes. podcast

Looking ahead: 2018 Five-Year Outlook

Jon Adams, Senior Investment Strategist & Portfolio Manager at BMO Global Asset Management, joins our latest episode of the Better conversations. Better outcomes. podcast to discuss the importance of the forum, the three scenarios that could drive markets in the next five years and what each could mean for investors and portfolio positioning.
 
Listen now

 


 

Additional scenarios and investment implications

Strategic asset allocation
View the investment implications on equities, fixed income, alternatives and currencies for all three of our scenarios in our over- and under-emphasis table.
Steady as she goes (60% probability)
Our base case scenario, in which we see the global economy continuing to enjoy steady growth with modest inflation, despite the slight headwinds created by the gradual withdrawal of quantitative easing and higher interest rates.
Policymakers pull the punchbowl (30% probability)
Our downside scenario, where we are concerned that there will be policy errors that could start the chain reaction that leads the U.S. and then the rest of the world into a recession.

 


 

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