Neuberger Berman
December 19, 2016
Delivering compelling investment results for our clients over the long term since 1939.

Equity

A more business-friendly environment could provide a tailwind in the U.S.

U.S. Equities

After upgrading our view on U.S. equities across the capitalization spectrum to slightly overweight in November, the Committee maintained our outlook in our latest reassessment despite the sharp post-election rally. Though market valuations remain at the high end of historical ranges, the U.S. equity market continues to be biased higher, as corporations stand to profit from a more business-friendly landscape marked by proposals to lower taxes, reduce regulatory burdens and enact robust fiscal spending programs. Small businesses tethered to U.S. growth, in particular, could thrive, as they may benefit from those aforementioned factors without also being punished by the anti-trade rhetoric impacting large multinationals.

New Administration Policies Expected To Boost Earnings

S&P 500 Calendar Year Bottom-Up EPS (US$)

Source: FactSet.

Public Real Estate

The Committee maintained its slight underweight for public real estate. REITs delivered strong performance for much of 2016, benefitting from the global search for yield. The asset class has sold off post-election in the face of climbing interest rates, however, and remains vulnerable to the potential for further rate increases.

Non-U.S. Developed Market Equities

We reduced our outlook for non-U.S. developed market equities to neutral at the post-election meeting in November and maintained that outlook for the first quarter of 2017.

Europe: The Committee maintained our neutral bias toward European equities. Though European equity markets continue to look cheap by many measures, investors are likely to express a preference for U.S. risk assets in the new pro-growth, pro-inflation Trump regime. With a host of impactful elections on tap across the euro zone in 2017, the ECB announced that it would extend the duration of its quantitative easing program until at least December 2017 while reducing its monthly asset purchases to €60 billion per month (from €80 billion) beginning in April 2017.

Japan: We maintained our neutral view on Japanese equities. Japanese stocks have spiked post-election, with the Nikkei Index hitting 2016 highs in recent weeks. The rally likely has been driven in part by the prospect of a pro-growth Trump administration and the stronger dollar/weaker yen that is likely to result, to the benefit of Japanese exporters. With yields on 10-year JGBs pushing above zero for the first time since February, the BOJ offered to purchase an unlimited amount of short-maturity issues as part of its new “yield curve control” policy, but found no takers at its below-market ask.

Emerging Markets Equities

The Committee downgraded emerging markets equities to slight underweight from slight overweight at our November meeting and maintained that position for our First Quarter 2017 Outlook. A stronger dollar and higher U.S. interest rates could weigh on the asset class even as the anticipated increase in U.S. infrastructure spending potentially benefits certain markets directly while helping to support global growth in general. The prospect of trade reform and tariffs further complicates the situation for emerging markets equities and currencies. In our view, valuations in the complex remain broadly attractive, presenting an opportunity to invest in high-quality names at a discount. China remains a key risk.

Brazil: While it was hoped that the removal of former President Rousseff would allay the political uncertainty that has gripped the country, new President Terner finds his administration similarly enmeshed in allegations of corruption. Terner, meanwhile, has pressed ahead with his financial and economic reform agenda since taking office; while these measures have been welcomed by investors, they are unpopular with large swaths of Brazilians. The latest batch of economic data indicated that the Brazilian recession has persisted into third quarter 2016, though expansion is likely to return in 2017.

Russia: Russia has been one of the top performing emerging equity markets following the U.S. elections. Expectations that a Trump administration could lead to a thaw in tensions between Washington (and the West in general) and Moscow has contributed a certain amount of optimism, while Russia also has enjoyed the recovery in oil prices throughout the year and stands to benefit from a planned global production cut in 2017.

India: In November the Indian government launched a “demonetization” program through which all 500 and 1,000 rupee notes currently in circulation must be exchanged for new bills before year end, with the intention of rooting out tax cheats and the likely unintended consequence of reduced consumption in the near term. The Reserve Bank of India recently surprised markets by holding key rates steady following its December policy meeting, citing inflation concerns and general global uncertainty. The central bank also trimmed its expectation for full-year fiscal 2016 growth to 7.1% from 7.6%.

China: China remains a key risk to the emerging markets and global growth in general, as Beijing faces a number of potential bubbles—in real estate, in debt, in commodities—that will require a deft policy hand to negotiate safely. An already-contentious relationship with President-elect Trump adds another layer of complication to the geopolitical landscape.

 

About the Asset Allocation Committee

Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience.

Committee Members

Joseph V. Amato | Biography
Co-Chair & President and Chief Investment Officer—Equities

Erik L. Knutzen, CFA, CAIA | Biography
Co-Chair & Chief Investment Officer—
Multi-Asset Class

Thanos Bardas, PhD | Biography
Portfolio Manager, Head of Global Rates

Alan H. Dorsey, CFA
Chief Risk Officer

Richard Gardiner | Biography
Head of Investment Strategy Group & CIO, Neuberger Berman Trust Company

Ajay Singh Jain, CFA | Biography
Head of Multi-Asset Class Portfolio Management

 

David G. Kupperman, PhD | Biography
Co-Head, NB Alternative Investment Management

Ugo Lancioni | Biography
Head of Global Currency

Wai Lee, PhD | Biography
Head of the Quantitative Investment Group, Director of Research

Brad Tank | Biography
Chief Investment Officer—Fixed Income

Anthony D. Tutrone | Biography
Global Head of Alternatives

 

 

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This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Diversification does not guarantee profit or protect against loss in declining markets. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

The views expressed herein may include those of the Neuberger Berman Multi-Asset Class (MAC) team, Neuberger Berman’s Asset Allocation Committee and Investment Strategy Group (ISG). The Asset Allocation Committee is comprised of professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates. ISG analyzes market and economic indicators to develop asset allocation strategies. ISG consists of five investment professionals and works in partnership with the Office of the CIO. ISG also consults regularly with portfolio managers and investment officers across the firm. The views of the MAC team, the Asset Allocation Committee, and ISG may not reflect the views of the firm as a whole, and Neuberger Berman advisers and portfolio managers may take contrary positions to the views of the MAC team, the Asset Allocation Committee and ISG. The MAC team, the Asset Allocation Committee and ISG views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

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