Page 2 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

INVESTMENT STRATEGY COMMITTEE MEETING RECAP – HELD ON SEPTEMBER 5, 2017
Major macro factors affecting the economy and financial markets over the next six to twelve months include U.S. earnings
growth, Federal Reserve policy, tax reform and interest rates.
U.S. ECONOMY – Scott J. Brown, Ph.D., Chief INTERNATIONAL EQUITY – Chris Bailey, European Strategist,
Economist, Equity Research Raymond James Euro Equities*
The majority of the committee is neutral (2.5 – 2.9%) to somewhat Almost 90% of the committee is bullish to some degree on non-U.S.
negative (2.0 – 2.4%) on real U.S. GDP growth over the next six to twelve developed equities, while 75% are bullish on emerging market equities over
months. Inflation is expected to remain about the same at 1.5% for the the next six to twelve months.
same time frame.
• “There are several events coming up in the next few months. The
• “Hurricanes Harvey and Irma will distort much of the economic first, and probably the least important, is the German election. Angela
data and possibly shave a few tenths off of 3Q17 GDP growth, but Merkel is going to win it.” 1
we should see a rebound in the fourth quarter.”
• “Emmanuel Macron has the opportunity to actually push through some
• “Much of the economic data were looking spotty ahead of the proper change in France. If France moves, then you’ll see the tone and
hurricanes, with overall growth trending at a lackluster to moderate the shape of the whole European debate move as well. I’m the most
pace.” optimistic I’ve been about European reform right now. I actually do
think this time it is changing.”
• “The showdown over the FY18 federal budget and debt ceiling has
been postponed to December 8. A budget agreement is necessary • “The third aspect is Brexit, which remains – to be honest – totally
before tax reform efforts can get underway. Broad tax reform (lower boring. Debates continue, which is good because it means the whole
rates and reduced deduction) is nearly impossible, as nobody wants timetable gets kicked out. Rather than a very hard, fixed two-year
to give up their deductions, but lower tax rates are still expected period, in practical terms it will probably be somewhere between four
at some point (just on a smaller scale).” and six years, having less impact on economies.”

U.S. EQUITY • “The opportunity set in Europe remains good. I do believe in the reform
The majority of the committee is neutral to bullish on U.S. equities over process, and I believe this is the source of gains from a global asset
the next six to twelve months. allocation basis for European markets. I think similarly about Asia and
am still really impressed by Chinese economic reform efforts.”
• “We’ve transitioned from an interest-rate driven to an earnings-
driven secular bull market that has years left to run.” FIXED INCOME
– Jeff Saut, Chief Investment Strategist, Equity Research We don’t see anything trend-wise changing in the near term, and should
continue to see rates trickle down.
• “The S&P 500 continues to sustain its momentum due to improving • “We are certainly seeing intermediate and long-term interest rates
economic activity and earnings growth, along with renewed trickling down. The support on the short end of the curve has
optimism over tax cuts. While participation in the S&P 500's been central bank interference. We have to acknowledge that the
advance had been narrowing (causing technical concerns), relative markets are also being driven by cash. Combined, central banks
performance for the small and mid caps has sharply improved over are currently over $19 trillion in size now – that’s the size of U.S.
the past month. This came on the heels of President Trump and GDP.”
Congressional Democrats agreeing on a three-month extension
to the debt limit, which spurred the return of the reflation trade • “For a lot of reasons, interest rates aren’t going up quickly any
and was supported by the Trump administration's tax proposal.” time soon. Along with central bank cash, there is interest rate
disparity among most other economic powers with rates well
• “The path of tax changes (timing, size, and details) will likely below ours. This is seen through strong indirect participation in
increase volatility now that it has been brought to the forefront of Treasury auctions, which is also placing downward pressure on
the Congressional agenda and will continue to be a significant rates.”
influence on the equity market in the coming months. If we do
see choppiness, the downside should be limited. We would be • “We’ve seen a shift within some of the sectors, too. Munis have become
buyers of those pullbacks until something changes with these more expensive and corporates are cheapening. But the belly of the
pillars of support – a healthy global economy, earnings growth, curve is still staying whole. You’ve got to go out about 15 years on the
low interest rates, and fairly loose monetary policy around the muni curve to get 85% of the total value, while the corporate curve
world. They remain supportive of equities longer term.“ provides 85% of its value around 11 years out. At the very short end,
even some short-term instruments like CDs are starting to play a role.”
– Michael Gibbs, Managing Director, Equity Portfolio & Technical
Strategy – Doug Drabik, Senior Strategist, Fixed Income

1 As expected, Angela Merkel and her party won a plurality of the vote in the national election held on September 24, 2017.
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