BMF Wealth Investment Outlook

• 11 January 2017
• Brad Mendel

We are pleased to provide our BMF Wealth outlook for 2017.

2016: Tantrums, Terrorism and Trump

2016 was a year remembered most by a major shift in the global political landscape to one of anti-establishment nationalism.

The two key events of the Brexit vote in June and the US election in November, of which BMF Wealth predicted both results, had meaningful impacts on the direction of global investments across all major asset classes.

Additionally, we saw increased levels of terrorism across Europe bringing nationalistic, antiimmigration and anti-EU political parties to the forefront.

2017: The Year Ahead – Be Prepared

We are not in the game of predicting expected returns for the year ahead. We seek stability of portfolios, diversification of risk and constant communication with our clients.

However, we do predict that the world and global markets will remain fragile from potential major disruptions. Again, markets will be heavily focused on the Trump Presidency (including what it actually delivers versus its rhetoric), European elections and China.

This year will demand vigilance and we are skeptical of those who say they have all the answers. We continue to expect gold to behave as the proverbial canary in the coalmine and will be steadfast holders of the asset as global debt grows and as economic fragility remains.

As Monetary Policy reaches the limits of its effectiveness, high quality, cash flow generating companies trading at discount to fair value will outperform their peers. In this environment, we expect our selected managed funds to meaningfully outperform passive funds and ETFs. Volatility will bring market opportunities which our clients are positioned to take advantage of.

We expect we will be contending with the following potential scenarios:

USA

• Should President Trump succeed in passing his tax reform, the way of doing business in and with the United States will dramatically change. The estimated US$500b in additional fiscal spending per year should also revive confidence in the economy but add to already high government debt levels.
• As a result of this, and combined with higher oil prices, we expect inflation to return and the Federal Reserve to increase interest rates faster than expected. The bond bubble is slowly popping.
• Trump’s protectionist trade policies may negatively impact corporate bottom line earnings with higher input costs.
• The stronger USD against major currencies including the Euro, British Pound and the Japanese
• Yen will be a headwind for US earnings but may be offset by major regulatory and tax reform.
• Technological innovation will no longer only be about apps, the cloud and software but also an acceleration of automation, artificial intelligence and virtual/augmented reality, disrupting or enhancing major industries. The rise of Amazon’s ‘Alexa’ and Google Home will infiltrate our lives more and more.

Europe

• We expect the European Union to continue its slow path to disintegration with Dutch (March), French (April/May), German (September) and possibly Italian elections this year.
• We therefore expect Germany to abandon its push for a Fiscal Union as nationalistic fringe parties gain popularity.
• Some European banks, particularly Italian, may require Government support and the ECB will remain highly accommodative. It may however abandon its negative interest rate policy.
• Terrorism will remain a constant threat and influence the outcomes of the above stated elections.
• The UK’s path to Brexit will be beset by hurdles but ultimately it will emerge in a stronger position.

Asia-Pacific

• Chinese corporate debt levels remain a concern and recent volatility in their bond market is worrying. We view China as being a probable cause of a major unexpected market event.
• Additionally, an escalation of tensions between China and the USA over the South China Sea will be closely watched as it may place Australia into a difficult diplomatic position.
• Australia will struggle in its transition from the commodity and construction booms and we anticipate it is likely to lose its AAA rating. Despite higher inflation later in the year, we believe interest rates will remain low as consumer confidence remains depressed. Retailers will suffer as Amazon extends its tentacles across our shores but it will be a win for consumers and logistics companies. We expect select commercial property will remain resilient, particularly the Sydney office property market.

We expect our global research capabilities will enable us to preserve capital while navigating the above with a focus increasingly on the return of capital in addition to the return on capital.

BMF Wealth values discipline and tactical asset allocation strategies across various asset classes, currencies and geographies.