Asset allocation will be the major challenge this year as investors have to deal with Europe and Japan loosening monetary policy while the US pursues fiscal supply-side policies, according to boutique fund manager Instreet.
“The consequence of this different approach will drive bond prices higher and create monetary and fiscal policy issues in Europe and Japan. It will also see the US dollar continue to strengthen, with the fallout for investors being a challenging environment in terms of asset allocation,” Instreet managing director George Lucas said.
“Asset allocation strategies that have worked for the past eight years, focusing on central bank activity, may not work going forward,” Mr Lucas added.
While December’s long-anticipated US rate hike sent markets into overdrive, Mr Lucas says US fiscal policy will become even more significant in 2017.
“Even US rate rises will take a second seat to fiscal policy announcements as the US Federal Reserve attempts to stay ahead of re-inflation policies coming out of the US government,” he said.
Any moves will likely see the Turnbull Government taking note since it affects Australia’s global competitiveness.
“Our 30 per cent company tax rate will look high compared with the 15 per cent being proposed by Trump for the US. It’s also higher than the UK’s 20 per cent rate, not to mention the low Asian corporate tax rates,” Mr Lucas said.
“This will create an issue for the Australian government since it has been trying to encourage more fixed investment by companies following the mining boom as corporates look to invest in countries with low tax rates. As a result, it won’t be surprising to see the corporate tax rate back on the political agenda for Australia in 2017,” he added.
More broadly, investors should be more bullish on some Australian sectors Mr Lucas said.
“Finally, as global investors shift their money out of defensive assets and into sectors such as energy, materials and banks, Australian equities should eventually benefit, thanks to our high exposure to these sectors.”