US equities and bonds are likely to become increasingly attractive through 2017, according to wealth management firm Northern Trust.
The company said US equities and high yield bonds will be “more attractive than other global risk assets over the next 12 months” due to policy changes following the 2016 US election and increasing interest rates.
“The prospect of tax cuts, regulatory reform and fiscal stimulus by the incoming administration and Congress moved the US growth outlook from below 2 per cent to between 2.0 and 2.5 per cent, while other developed economies are projected to grow less than 1.5 per cent in 2017,” the company said.
Northern Trust said the current economic environment, coupled with the possibility of pro-growth reforms under incoming president Donald Trump, would “support risk taking in 2017”.
“We recommend an overweight to US assets because of stronger earnings growth and a clearer political agenda,” the company said.
Northen Trust did, however, caution that risks remained with regard to inflation and the Federal Reserve’s subsequent reaction.
“The primary risk scenario for the US is higher-than-expected inflation and an aggressive response by the Federal Reserve, with higher interest rates having the potential to pressure equity valuations and increase market volatility,” the company said.
Commenting on the recent Federal Reserve meeting, Natixis Global Asset Management chief market strategist David Lafferty said an aggressive policy response to incoming stimulus should not be discounted as a possibility for 2017.
“If the coming fiscal stimulus is large enough to boost growth and/or inflation expectations about their current forecasts, the Federal Reserve could be more aggressive in tightening,” he said