Perspectives for an Energizer Market

Investment Quarterly – Fourth Quarter 2017

Key trends and ideas that are informing current market conditions and investor behavior.

The current equity bull market has been nothing if not resilient. Some recent events—damaging storms, geopolitical saber-rattling and changes in monetary policy—could have caused it to stumble. But the past few months have been quite good for stocks, and it’s not hard to understand why.

First and foremost, there’s the global economy. All 45 countries tracked by the OECD are on a growth path for the first time in a decade. In the U.S., consumers are confident and jobs growth remains strong. Although three hurricanes took a bite out of GDP growth in the third quarter, recovery efforts are likely to contribute to a modest rebound early next year. In Europe, few are talking about deflation at this point, and fund flows have reflected investor optimism about economic growth in the region.

Of course, the market is a psychological beast, and the “Trump trade” made a surprise reappearance as Republicans introduced their tax proposals. We are skeptical that anything resembling “reform” will emerge, but there could be corporate and individual tax cuts to reward the optimists.

At this point, the market is taking in stride the Federal Reserve’s plans for quantitative tightening. This is both a result of the incremental pace preferred by FOMC members and their obsession with transparency. So far so good, although we may see more volatility as other central banks get into the act later next year.

This issue of Investment Quarterly explores key trends and ideas that are informing current conditions and investor behavior. Up front, we offer fresh insight into the active/passive debate, noting persistent performance delivered by quality managers over the past decade. We also consider the seismic changes to the auto industry and the potential impacts of the Fed’s shift to pull back on quantitative easing.

I hope you enjoy IQ. Please contact your Neuberger Berman representative with any questions about the markets or your portfolio.

Joseph V. Amato
President and Chief Investment Officer—Equities

 

Highlights 4Q17

From the Asset Allocation Committee

U.S. Equities: Elevated valuations combined with risks tied to monetary tightening account for our below-normal 12-month outlook for large caps. Small- and mid-cap stocks are a neutral, though they could benefit from tax reform.

International Equities: The European economic recovery is ongoing, supported by the ECB’s accommodative monetary policy, while the weak yen is helping Japanese competitiveness, prompting our above-normal 12-month view.

Emerging Markets: An environment of synchronized global growth, low inflation, low interest rates and a weak dollar is supporting our above-normal 12-month outlook for both EM equities and fixed income.

High Yield Fixed Income: Credit spreads are tight, but the sector still provides a more attractive risk/reward profile than investment grade bonds due to a higher expected return profile and lower interest rate risk.

Private Equity: Despite elevated valuations, the asset class still looks attractive versus public equities. We think lower leverage and higher quality make the segment less risky than a decade ago.

Hedge Funds: We favor lower-volatility hedged strategies, which may appeal to investors looking for ballast in portfolios. A lack of market direction and increased dispersion within markets could favor alpha-driven strategies.

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