We see a favorable backdrop for equities and convertible securities through the
remainder of the year, although late-cycle pressures may increase going into 2018.
Global growth has rebounded significantly, and we maintain our expectation for
sustained and balanced global expansion through 2017. PMIs are converging and
expanding, there is little risk of the U.S. overheating, the recovery in Europe is
strengthening, and many emerging markets continue on favorable trajectories.
Global monetary policy should provide a near-term tailwind to equities and convertibles while not
creating stiff headwinds for fixed income. We expect the Federal Reserve to maintain a gradual approach
to increasing short-term rates. Other central banks have also begun to assume less accommodative
stances, but we anticipate slow and deliberate approaches across the globe. As long-term rates are
unlikely to soar, there are ongoing opportunities within the fixed income market.
We remain mindful of risk. Populist pressures have lessened in Europe, but elevated political uncertainty
and contentious fiscal policy negotiations in the U.S. persist. North Korea’s bellicose stance gives pause,
as do strained U.S. ties with China and Russia, and evolving trade relationships. Central banks remain
very accommodative, but unexpected shifts in monetary policy could have negative consequences for risk asset prices and real economic activity, particularly after years of
unprecedented support. Corporate earnings are on the rise, but so too are levels of debt.
Market rotation is likely to continue, which may exact a steeper toll on
higher-valued names. More broadly, we would not be surprised to see
the market retrace ground in the midst of its advance— indeed, the
absence of corrections over recent months is perhaps more surprising.
During the second quarter, market participants looked through global geopolitical tensions and U.S. fiscal policy challenges, focusing instead
on generally improving economic survey data, strong corporate earnings, contained inflation and well-behaved long-term interest rates.
Stocks marched higher and convertible securities participated in a healthy measure of these gains. Emerging markets set the pace to beat,
with a weaker dollar providing a supportive tailwind. Globally, growth led value. Although the Fed continued to tighten and announced its
intention to slow its bond-buying activities sooner than many anticipated, U.S. Treasury bonds demonstrated continued resilience.
FIGURE 1. GLOBAL ASSET CLASS PERFORMANCE, Q2 2017
Past performance is no guarantee of future results. Source: Morningstar and Bloomberg. Data shown in USD unless otherwise noted.
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