2017 Outlook:
Navigating a World in Transition

Investors in 2017 are facing a world in transition. The result of the U.S. presidential election and the earlier vote by British citizens to leave the European Union potentially reflect populist sentiment that appears to be challenging the decades-long march of globalization. What's more, investors are recognizing that aggressive central bank stimulus may have reached its limits, and a transition to fiscal policy is at hand. Where should investors turn in such an environment? Our 2017 Outlook takes a trip around the globe, detailing the most important economic and investment themes as well as the portfolio implications from investing in a changing world.
The global economy continues along its low-growth path, but there are a number of bright spots. In the U.S., despite the political uncertainty, a strengthening consumer is driving stronger growth. A large fiscal stimulus under the new administration could well provide another boost to the U.S. economy. And in many emerging markets the rebound that began in 2016 appears to have momentum, supported by higher commodities prices and structural reforms. Europe remains challenged by uncertainty about the future of the European Union, low growth and high unemployment.
A seven-year equity bull market has lifted stock valuations in the U.S., but many parts of the world are trading at discounts. Emerging markets and international markets are both below their 10-year average price-to-earnings ratio. Political and economic uncertainty remains, but there are bargains to be found for active investors seeking solid companies at attractive prices.
U.S. government bond yields are near record lows, but are actually quite high relative to the rest of the world. Currently, 10-year Treasuries yield more than 85% of developed market sovereign debt. Even if U.S. rates rise and the new presidential administration's policies are inflationary, the "lower for longer" trend seems sustainable well into next year while Europe and Japan continue to experiment with negative policy rates and quantitative easing.
Results from the U.S. presidential election and Britain's vote to leave the European Union highlighted a year where political populism gained momentum. But even amid that uncertainty, markets climbed a wall of worry in 2016. The lesson for this? It's better to stick to your long-term plan and not get distracted by the latest political drama. Looking ahead, policy changes will affect individual businesses in different ways, so active investors will have an opportunity to build attractive company-by-company portfolios.

Disclosure

* Income from municipal bonds may be subject to state or local income taxes and/or the federal alternative minimum tax. Certain other income, as well as capital gain distributions, may be taxable. Methodology for calculation of taxable-equivalent yield: Based on 2015 federal tax rates. For the year 2016, there will be an Unearned Income Medicare Contribution Tax of 3.8% that applies to net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (for single filers) and $250,000 (for married filing jointly). Thus taxpayers in the highest tax bracket will face a combined 43.4% marginal tax rate on their investment income. The federal rates do not include an adjustment for the loss of personal exemptions and the phase-out of itemized deductions that are applicable to certain taxable income levels. Index proxies for below-investment-grade and investment-grade munis are Bloomberg Barclays Municipal High Yield Index and Bloomberg Barclays Municipal Bond Index, respectively; U.S. taxable bonds represented by Bloomberg Barclays U.S. Aggregate Index. The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in indexes.

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