Balentine’s 2018 Capital Markets Forecast is our signature research piece for the new year, serving as the foundation of our investment process and featuring our best thinking on topics ranging from tax reform to cryptocurrencies.
Given 2016’s sharp turns in both the ﬁnancial markets and the political cycle, we believe the world is on the cusp of some important transitions.
The previous year was rife with global political surprises, as politics are now increasingly a place for the “have nots” to wage war on the “haves.”
Newspaper headlines shout the story: “Mass Migration in Europe is Unstoppable” and “A Mass Migration Crisis, and It May Get Worse.” Despite the near-apocalyptic tone of the press, the actual situation is not as unique as suggested. The humanitarian crisis is heart wrenching; however, we are going to focus on addressing the broader questions of human migration trends, the specific issues facing Europe and what the future might hold, and potential investment implications.
A key theme in Balentine’s 2016 Capital Markets Forecast is that public market returns face strong headwinds going forward. Valuations in equities and bonds are near all-time highs which create difficulties for clients who seek real return. It is therefore Balentine’s job to bridge this gap, taking intentional risks in portfolios to smartly increase the expected return for clients. One way Balentine aims to achieve this is through a diverse allocation to private capital.
Reinsurance is a risk transfer service for insurance companies. When insurance companies write enough policies to become concentrated in one area or they need to write more policies to keep the relationships they have, they will engage a reinsurance firm.
The majority of Balentine’s communications in 2016 have centered around the deteriorating market conditions and the weakening effectiveness of central bank policies to assuage the market’s concerns. Given our projections for meager economic growth, we have had to turn to creative solutions for client portfolios to meet their long-term objectives. One such solution is an art-based decision to allocate to gold.
Our decisions to derisk in the fall of 2015 have sharply reduced drawdowns in the face of recent months’ equity market price action. Last month, we addressed the likelihood of a recession in 2016 and discussed the possibility of further derisking Balentine client portfolios. In March, Balentine’s models were bearish for a seventh straight month. Each time Balentine’s models have produced seven straight monthly bearish signals (2000-2001, 2002-2003, and 2008), a significant drawdown has occurred.
Across the investment landscape in Market Risk, the opportunity top of mind for many investors is the potential for a rebound in commodity prices, most notably oil. Commodities, oil, and oil-related equities could rally, as assets tend to have sharp rallies when sentiment and technicals get overly bearish. However, the key word for us is “tradeable.”
Over the last six months, we have taken decisive steps to preserve capital. The volatility and uncertainty we anticipated late last summer is playing out now, and several markets are moving closer to pricing in a recession.