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Trump’s First Year – What’s Realistic

One week from the inauguration of the 45th president and the market’s high expectations for policymaking, what is realistic for investors to expect from Washington in 2017?

Accordig to Libby Cantrill, PIMCO’s Head of Public Policy, and her team, the bottom line is that governing is harder than campaigning. They believe, any of the items that President Trump and congressional Republicans are looking to tackle in 2017 – a healthcare overhaul, tax reform, infrastructure – are inherently complex and time-consuming, even with Republican majorities in both chambers of Congress. So, while they expect policymakers to focus on advancing the Trump agenda, there is a good chance that some of these agenda items slip into 2018 given the realities of Washington.

Key policy initiatives

Obamacare: Repeal and replace? One of the primary issues of overlap between President Trump’s policy agenda and that of congressional Republicans is the repeal of Obamacare. However, there is less agreement about what comes after repeal – with Trump and some Republicans advocating for a “repeal and replace” approach, while other Republicans supporting “repeal and delay.”

If Trump’s approach is pursued – which seems more likely – it could have implications for the timing of the rest of his agenda. Healthcare policymaking is notoriously complex and time-consuming; it took Congress 14 months to pass Obamacare after holding more than 100 hearings in the Senate and 80 in the House, and Obamacare still managed to pass only on a party-line vote. Also, the committees in Congress that would be tasked to write at least part of the replacement bill will also be in charge of the tax reform bill, another complicated and formidable undertaking. Lastly, Trump has promised that a replacement bill will provide “insurance to everybody.” While Trump may walk back from these comments, the pressure for congressional Republicans to deliver a comprehensive, Trump-endorsed healthcare overhaul has increased, which might take longer (most of 2017?) than many expect.

Tax reform or tax cuts? Another area of agreement between Trump and congressional Republicans is the issue of addressing the country’s tax code to make it more competitive. However, there is less agreement about how to actually do this. House Republicans want to proceed with tax reform on the individual and corporate side, while Trump has put forth a plan that focuses on tax cuts. Tax reform – simplifying the tax code, lowering rates and broadening the base – is notoriously more difficult and time-consuming than tax cuts, since it necessarily results in winners and losers. Yet, many would argue that only tax reform – not tax cuts – at this point in the economic cycle would lead to real improvements in productivity and therefore sustainable economic growth. For this reason, they expect House Republicans to try to advance a tax reform package, at least initially.

“But there is a long way to go from here to there. No bill has yet been written, and it is not clear whether Senate Republicans are on the same page as House Republicans, especially when it comes to more controversial topics such as the “border adjustment tax,” which would tax imports and exempt exports. Assuming tax reform is pursued (not just tax cuts), it will likely take longer than most expect given its complexity and may be a smaller package (e.g., rates not lowered as much) depending on where Republicans fall out on different controversial issues (e.g., the border adjustment tax). While the market appears to be pricing tax reform to be completed in 2017, there is a real possibility we don’t see a bill passed and signed by President Trump until 2018.” Cantrill says.

Infrastructure: While this is a topic that President Trump discussed often on the campaign trail and one where there is generally bipartisan support, Trump has provided few policy specifics, and this is yet another issue where the devil is in the details. Given the ambivalence many Republicans have for increases in non-defense spending, Trump may need Democrats to help pass an infrastructure bill. It is not clear what the appetite for that would be among congressional Democrats. So this also could slip to 2018.

Trade: Unlike the aforementioned issues, which need congressional approval, the White House has significant discretion around trade. Indeed, one of the first actions President Trump was to withdraw the U.S. from the Trans-Pacific Partnership. While this move was expected, “Trump’s approach to trade broadly is unknown: Does he follow the advice of his U.S. Trade Representative Robert Lighthizer, who worked under President Reagan and will likely use a more carrot-and-stick approach with trading partners like China? Or will he follow the more extreme and protectionist advice of Peter Navarro, the head of the newly formed National Trade Council? At this point, we don’t know, and as such, trade remains the primary area for a more “left tail” (downside) outcome.” She concludes.

ETFs/ETPs Listed Globally Gathered Record Inflows at the End of 2016

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ETFGI, the leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem, reported assets invested in ETFs/ETPs listed globally reached a new record high of US$3.546 trillion at the end of 2016 passing the prior record of US$3.444 trillion set at the end of November 2016.

In December, ETFs/ETPs gathered a record level of net inflows US$65.25 billion for December, marking the 35th consecutive month of net inflows. During 2016, ETFs/ETPs listed globally gathered a record amount of net inflows US$389.34 Bn surpassing the prior record of US$372.27 Bn gathered in 2015, according to preliminary data from ETFGI’s Year-end 2016 global ETF and ETP industry insights report.

Record levels of assets under management were reached at the end of 2016 for ETFs/ETPs listed in the United States at US$2.543 trillion, in Europe at US$571 billion. In Asia Pacific ex-Japan at US$135 billion, in Canada at US$84 billion and globally.

At the end of December 2016, the Global ETF/ETP industry had 6,625 ETFs/ETPs, with 12,526 listings, assets of US$3.546 trillion, from 290 providers listed on 65 exchanges in 53 countries.

“2016 was an eventful year with a number of unexpected outcomes – the UK vote for Brexit to leave the European Union and the election of Trump as the US President. The S&P 500 gained 12.0% while the DJIA increased 16.5% for the year. All US sectors performed positively for the year, with the exception of Health Care. The VIX declined by a dramatic 22.9%. European equities ended the year up 3.44% Canadian equities ended the year strongly with the S&P/TSX Composite and the S&P/TSX 60 were up 21.1% and 21.4%” according to Deborah Fuhr, co-founder and managing partner at ETFGI.

Asset gathering in December 2016 was very strong with ETFs/ETPs listed globally gathering net inflows of US$65.25 Bn setting a December monthly record. Equity ETFs/ETPs gathered the largest net inflows with US$63.28 Bn, followed by fixed income ETFs/ETPs with US$6.72 Bn, and active ETFs/ETPs with US$1.50 Bn, while commodity ETFs/ETPs experienced net outflows of US$4.24 Bn.

ETFs/ETPs listed globally gathered a record amount of net inflows US$389.34 Bn during 2016 surpassing the prior record of US$372.27 Bn gathered in 2015. Equity ETFs/ETPs gathered the largest net inflows during 2016 with US$231.91 Bn but less than the record US$258.21 gathered in 2015, followed by fixed income ETFs/ETPs which gathered a record level US$111.58 Bn passing the prior record of US$81.65 set in 2014, and commodity ETFs/ETPs which gathered a record level of US$30.85 Bn passing the prior record of US$23.44 Bn set in 2012.

iShares gathered the largest net ETF/ETP inflows in December with US$23.73 Bn, followed by SPDR ETFs with US$18.45 Bn and Vanguard with US$13.34 Bn net inflows.

In 2016, iShares gathered the largest net ETF/ETP inflows with US$138.40 Bn, followed by Vanguard with US$96.79 Bn and SPDR ETFs with US$62.47 Bn net inflows.

The Market Is Underpricing Inflation Risks

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El mercado no está tomando en serio los riesgos de una mayor inflación — CC-BY-SA-2.0, FlickrPhoto: Chris Dlugosz. The Market Is Underpricing Inflation Risks

The actions of central banks and the search for yield were once again dominant themes for investors during 2016. Says Barry Gill, Head of Active Equities at UBS AM. He believes that the wider market’s strongly consensual views about ’lower for much longer’ have been evident in a host of crowded trades across asset classes that only began to demonstrate the first signs of vulnerability in the wake of the US election.

“Within equity markets, these crowded trades include bond proxies and structured vehicles targeting isolated risk premia factors, including lower volatility. However, we believe the quantum of capital now focused on such factors presents an asymmetric risk to investors: despite recent underperformance, low volatility stocks in the US are almost as expensive as they have ever been.” Explains Gill.

In his view, this strongly suggests any change in the ’lower for longer’ narrative could see both the realized return and realized volatility of these factor exposures differ significantly from the recent history that attracted investors in the first place.

Inflation risks underpriced

With a surprise Trump presidency focusing attention on the US, what and where are the disruptive forces which could further shake investors in US equities from their consensual thinking in the coming months? “When we look at the macroeconomic assumptions discounted in markets, the one key area where we see widespread complacency is inflation. A Trump presidency likely exacerbates those risks. ’Lower for much longer’ has become accepted wisdom – and a broad investor base is positioned aggressively in the expectation that inflationary forces have been slain.”

But, according to Gill, this view flies in the face of several data points and emerging trends. Notwithstanding the sharp move higher in oil from its February lows, with the US economy close to full employment, they see potential for a tight labor market to squeeze wages higher still.

“And while wage growth in the official US average hourly earnings statistics currently looks modest, we do not believe this is representative of cost pressures experienced by listed companies. The Atlanta Federal Reserve Bank has created a more representative wage growth gauge which is currently running at 3.3% YoY. These higher costs are highly likely to be passed on to consumers. If they are not, margins and profitability will have to bear the brunt. Neither outcome is reflected in equity prices at the time of writing.” He concludes.

Schroders Launches First High Yield Fund Using the “Value Approach”

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Schroders lanza el primer fondo de deuda corporativa high yield con sesgo value — Pixabay CC0 Public DomainFoto: Unsplash. Schroders Launches First High Yield Fund Using the “Value Approach”

Schroders launched the Schroder ISF Global Credit Value. The fund is one of the first of its kind and will use a value investment style to invest in the global credit universe. According to a press release, the value approach will enable the team to identify opportunities in out of favour market segments with the aim of providing investors with a high total return.

The fund will not be constrained by a benchmark, allowing the investment team the flexibility to maintain their contrarian approach and exploit opportunities in the global credit universe, consisting of bonds of corporate and financial issuers (including developed and emerging markets), convertibles and other securities.

The fund will be run by the credit team based in London, as part of Schroders’ well established global credit franchise and managed by Konstantin Leidman, Fixed Income Fund Manager, with the support of over 40 analysts around the globe.

Leidman said: “We will focus on sectors and regions that have been hit hard by negative investor sentiment and aim to identify issuers in these groups that have been undeservingly punished. They may be unloved due to some political or other bias, or simply unfashionable; overlooked or under-researched where investors are absent and valuations are very cheap. Our philosophy is based on minimising the risk of permanent capital loss and applying a large margin of safety – or discount – which means we aim to buy bonds for significantly below their intrinsic value to maximise returns and minimise losses.”

John Troiano, Global Head of Distribution at Schroders, said: “We’re delighted to be able to offer investors this innovative investment strategy. The new fund will be suitable for long-term investors seeking superior total returns and to diversify their portfolios. The value approach in global high yield corporate bonds has so far been under-utilised by the investment community, we are one of the few managers to offer such a strategy.”

Rothschild & Co and Compagnie Financière Martin Maurel Have Merged

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The proposed merger between Rothschild & Co and Compagnie Financière Martin Maurel to create one of France’s leading independent private banks announced last June is now successfully complete. The merger will build upon the relationship that has existed between the Rothschild and the Maurel families for three generations. The operational integration of the two private banks Rothschild Patrimoine and Banque Martin Maurel should be finalized in the second half of 2017 so as to create a combined group operating under the name Rothschild Martin Maurel.

Rothschild Martin Maurel will be a leading independent family controlled private banking group operating in France, Belgium and Monaco, with a distinctive market positioning targeted notably at entrepreneurs. The group will have combined AUM of €34 billion, offer a particularly broad wealth management, asset management, financing and corporate finance advisory service and enjoy a greater geographic footprint in France.

Prior to this transaction, Rothschild & Co held 2.3% of Compagnie Financière Martin Maurel while the latter held 0.90% in Rothschild & Co. In accordance with the terms of the protocol signed in May 2016, the majority of the transaction was in the form of an exchange of shares on the basis of a parity of 126 Rothschild & Co shares per Compagnie Financière Martin Maurel share. The Maurel family received shares and reinforced its presence in the extended family concert of Rothschild & Co, of which it was already a member. The transaction was financed 62% by issuing 6.1 million new shares and 38% by external bank facilities of €88.3 million. The significant non-family shareholders of Compagnie Financière Martin Maurel had already agreed to tender their shares to the cash offer in accordance with the terms of the initial protocol.

David de Rothschild, Chairman of Rothschild & Co, said, “The combination of two family controlled businesses that share the same history, the same culture and the same vision of their industry, creates an outstanding company and we are delighted to celebrate this merger today. The transaction is in line with our strategy to accelerate our growth in private wealth and of focusing on annuity style revenues. I am pleased that the Maurel family will maintain its involvement alongside the Rothschild family in the new group.”

“Our two groups embody a family model that distinguish and strengthen us when compared to our competitors. This combination allows us to broaden the range of our offerings to all our clients, especially entrepreneurs, thanks to a strengthened and broader range of asset and wealth management products and services,”underlined Bernard Maurel.

Lucie Maurel Aubert said, “We will be able to develop these offers in Paris and also, thanks to our strong regional presence, in Lyon, Marseille, Aix en Provence, Grenoble and Monaco, while adding the skills of Rothschild and Co in financial advisory and merchant banking. This alliance will enrich our expertise benefitting our customers and our teams and enabling us to meet the challenges of the future with confidence”.

The listing of Compagnie Financière Martin Maurel’s shares has been suspended. With effect from 4 January 2017, the new shares of Rothschild & Co are admitted to trading on compartment A of Euronext Paris and the shares of Compagnie Financière Martin Maurel is delisted from the Marché libre of Euronext Paris.

Stay Flexible in Investment Grade Credit as the Hunt For Yield Continues

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PineBridge: “El entorno señala a un crecimiento de la demanda de crédito investment grade en dólares en 2017” — CC-BY-SA-2.0, FlickrPhoto: Robert Vanden Assem, managing director at PineBridge. Stay Flexible in Investment Grade Credit as the Hunt For Yield Continues

In recent years, demand for US dollar investment grade credit has grown worldwide. Many investors have been drawn to this market by the attractive yield differential, large and diverse opportunity set, and absence of foreign exchange volatility. The outlook for the US economy, with anticipated progrowth fiscal and regulatory policy, should support US dollar strength and higher yield differentials, which we expect will continue to fuel demand for US dollar investment grade credit.

Here, Robert Vanden Assem, managing director and head of developed markets investment-grade fixed income at PineBridge, discusses frequently asked questions about investing in US dollar investment grade credit, the most liquid credit market in the world.

What do you think the US election results mean for fixed income markets?

On the whole, we are expecting mostly positive consequences of a Donald Trump presidency on US dollar denominated spread products. Tax cuts, possible infrastructure spending, repatriation of overseas cash, and a reduction in regulation are bullish for corporate markets.

The election result has also made certain sectors more attractive. Financials have been buffeted this year by the possibility of negative rates, and now they’re looking to be one of the more attractive sectors in fixed income with the likelihood of higher interest rates and relaxation of regulation. The aerospace and defense sector seem poised to benefit from a global increase in military spending, the metals and mining sector should benefit from an increase in infrastructure spending, and both energy and communications sectors should benefit from a more business friendly approach from their respective regulatory agencies. Finally, we see possible positive outcomes for corporates in the form of tax cuts, less regulation, and the possible repatriation of cash held overseas.

The election also gave a boost to the US dollar, which had been range-bound since last December. We think, going forward, a strong and stable dollar will contribute to performance of US dollar denominated fixed income.

From an interest rate volatility side, the prospect of fiscal stimulus and less regulation has already impacted our markets. We’re still expecting a decent amount of interest rate volatility, but the recent back-up in rates has provided an opportunity to invest at more attractive yield levels.

What risks do you see ahead?

I think a key risk at this point could be too much bullishness in markets. Beyond the obvious positives of more fiscal spending and less regulation, what the Federal Reserve does in response is something to keep an eye on.

Our view for a long time has been that the Fed cannot normalize policy unless there is an adequate correction in terms of the fiscal policy and regulatory policy within the economy. Of course, we now have hope that we might see that, but it’s still uncertain in terms of what the exact programs will be and their likelihood of success. Importantly, the US is still burdened by tremendous debt levels that continue to rise.

While the Fed finally raised rates this year, over the longer term it has been cutting its forecast, or its terminal rate of interest going forward. The market has continually underpriced the Fed, and it has been successful in doing that so far. More recently, however, Fed and market forecasts are coming together.

Ampliar

Inflation and labor markets are also not robust enough to warrant significant tightening in US monetary policy. While the longer term view of inflation (the five-year, five-year forward inflation rate) has ticked up a bit, it hasn’t moved enough to warrant concern at this point. And the job market is not as robust as you would normally see in a typical recovery. What is missing is investment, less regulation, and better fiscal policy.

Although our view is that the Fed will remain accommodative, central bank policy continues to be a big risk as we look into 2017. If markets get too bullish with any possible fiscal legislation or less regulation, the Fed could end up moving too aggressively, and that would negatively impact the economy. I think this is a major risk in 2017 and beyond.

Is there an area of fixed income that you favor currently?

Financials have been one of our more favored sectors, but they suffered in the past year due to fear of negative rates and low interest rates. Since the Global Financial Crisis, from a fixed income perspective, financials have been a great balance sheet story as they raised capital levels and improved liquidity. This year, however, they became more of an equity story, where earnings were a concern given the low and negative rate environment.

Going forward, we are positive on financials for two reasons. First, they have underperformed the rest of the market on this bounce back and appear attractive on a relative value basis. Second, with the prospect of less regulation and higher rates, there should be more opportunity for banks to increase profitability going forward. More recently, with the advent of Additional Tier 1 preferreds and Contingent Convertible securities, we have seen added interest in financials.

What is your outlook going forward?

Despite pro-growth changes we will likely see in fiscal and regulatory policy, we think that the big-picture rate environment is not going to change significantly. Moreover, we expect the global search for yield to continue. While the US is seeing positive developments, many advanced economies are still dealing with low growth, low inflation, and an increase in geopolitical risk. Therefore, we think that the market is not poised for the breakout growth that many investors seem to be anticipating at this point.

Looking ahead, we expect robust performance on a relative basis within the credit markets supported by a constructive environment for corporate fundamentals, strong global demand for US dollar investment-grade credit and relatively easy monetary policy. However, investors should focus on being nimble since liquidity dynamics are not what they used to be. The investor base is strong, as is demand, but the transmission mechanism for sales and purchases from investor to investor has changed. The dealer community is still inhibited by regulation, so they must maintain low levels of inventory. Therefore investors need to be mindful of liquidity and how they can maneuver within the market.

Brexit: A Difficult But Attainable End-March Timetable

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The UK Supreme Court rejected the government appeal that it could trigger Article 50 without Parliamentary approval. Financial markets posted little reaction with the 2-year and 10-year yields barely moving on the announcement, however, sterling retreated by around 0.5%, which supported a modest pick-up in equities, with the FTSE 100 up 0.25% after the reaction. Responding to the ruling, David Davis, the Brexit secretary, said a bill to trigger article 50 would be published “within days”.

In itself, and according to Axa IM strategist, David Page, the rejection was expected, given the High Court decision. He believes that the sting has been removed from this decision by a Parliamentary vote in December to back Prime Minister May’s timetable by 461-89 on the condition that the government spelt out its negotiating objectives and Parliament got a final say on the vote. “PM May fulfilled the first part of this in her 12-point Brexit plan last week and committed to a Parliamentary vote at the end of the process.”

In his opinion, procedural difficulties may remain. The Supreme Court ruled that an Act of Parliament will be required to trigger Article 50. “There is a risk that procedural challenges and proposed amendments may make the end-March timetable challenging.” The Scottish National Party has already suggested an intention to amend the Act. However, the Court did rule that the government does not need to consult regional assemblies. “This removes one of the larger remaining potential hurdles for PM May’s ambitious timetable. As such, there is a good chance that PM May manages to trigger Article 50 according to her timetable of end March, with only some risk of a small procedural delay to this.” He concludes.

Northern Trust Strengthens South Florida Wealth Management Team

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Northern Trust potencia su equipo de gestión patrimonial de Miami — CC-BY-SA-2.0, FlickrPhoto: Vladimir Kud . Northern Trust Strengthens South Florida Wealth Management Team

Northern Trust has promoted Rick Fernandez to Managing Director of one of its Wealth Advisory teams in its Miami office, and has hired Xavier Martinez as Senior Portfolio Manager within that team.

Fernandez, who joined Northern Trust in 2002, has responsibility for overseeing a team of professionals who serve high net worth clients and families with comprehensive wealth management services incorporating investment management, trust, and banking solutions.

Martinez will be directly reporting to Fernandez. He most recently served as Chief Investment Officer for Coconut Grove Bank, and immediately prior to that spent nine years with Fiduciary Trust International, where he managed high net worth client portfolios for more than nine years as Managing Director of Investments.

Alexander Adams, Northern Trust Senior Market Executive for Miami-Dade County, said, “These moves greatly strengthen our team, as Xavier brings to us deep expertise and experience in the precise type of clients we serve, while Rick’s extensive experience meeting our clients’ complex needs makes him extremely qualified to lead our talented team of professionals.”

Fernandez earned his MBA from the Darden Graduate School of Business at the University of Virginia, and his BBA in Finance from Florida International University. He is a Certified Private Wealth Advisor (CPWA). He is a Director of Make-A-Wish Southern Florida.

Martinez received a Bachelor of Science degree in Civil Engineering from Tulane University where he graduated Magna Cum Laude, and earned a Juris Doctor degree with honors from Duke University School of Law, where he was honored as a member of the Order of the Coif. He is a Chartered Financial Analyst (CFA). He is the President of the College Assistance Program, Inc. and the Secretary of the Board of Advisors for Belen Jesuit Preparatory.

Northern Trust’s Miami office is located at 600 Brickell Avenue, Miami, Florida.

More Turbulence Expected in 2017

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The asset management industry in Asia is set for a turbulent year in 2017, with the impending Donald Trump presidency in the U.S. and its impact on the global economy. For asset managers, the institutional space is becoming more interesting, with a growing trend of outsourcing by institutions.

After a very challenging 2016 in Asia’s asset management industry, what does 2017 hold? That is the question that underpins this quarter’s The Cerulli Edge – Asia-Pacific Edition which highlights key developments in 2016 in eight of the Asian markets we cover, namely, China, Hong Kong, India, Indonesia, Korea, Singapore, Taiwan, and Thailand. We also make some predictions on potential trends in each of those markets for 2017.

The impending Trump presidency and the geopolitical turbulence tipped to come with it will drive global macroeconomic factors in 2017. Although the repercussions remain to be seen after his inauguration in January, one thing that the Asian asset management industry will be closely watching is how his pledge to bring manufacturing jobs back to the United States pans out. This issue will be particularly important to Asian countries as many of them count the United States as one of their top-five trading partners. If the trade faucet to the United States begins to shut, this will inevitably lead to some restructuring as these economies seek and find new exports markets or new export products.

From an asset management perspective, a widespread restructuring will have an impact on asset allocations in Asian markets. However, this will be a long-term process. Any short to medium-term pain felt by Asian retail and institutional investors in the face of such changes would be the price they have to pay for longer-term gains.

Cerulli has observed that retail investors in the region have notoriously shorter-term investment horizons than their Western counterparts. Asset retention is a constant struggle, but likely more apparent in North Asian markets including China. Another commonality is that investor sentiment for financial products, including mutual funds, tends to be driven by stock market sentiment. Consequently, we tend to see outflows from equity funds when stock markets are falling.

In the recent past in Asia ex-Japan, this has led to some funds being diverted to bond funds or balanced funds. However, with growing expectations that interest rates may head higher in 2017, led by rate hikes by the Federal Reserve, bond funds and balanced funds may not be viewed as safe havens for a while. In such market conditions, we may see retail investors go back to their default positions, namely bank deposits. This would put the asset management industry back to square one in the region, after a lot of effort has been expended in recent years to mobilise people’s savings toward riskier financial products.

Having said that, across Asia, regulators all stand firm on investor protection–that is ostensibly one of their highest priorities. Their basic stance is that riskier products should only be sold to accredited or wholesale or high-net-worth investors. Plain-vanilla mutual funds and exchange-traded funds are seen as more desirable for ordinary investors. Further, most Asian regulators share a keenness to develop their local mutual fund industries, and offer incentives to asset managers who show commitment to the domestic market. A prominent example is Taiwan’s scorecard that incentivizes foreign asset managers to set up shop on the island.

Cerulli has also noticed asset managers’ burgeoning interest in targeting institutional assets in the region. Institutional investors are increasingly searching for yield outside their comfort zones, and will typically outsource to asset managers with strategies that they do not have internal capabilities in, including foreign investment and alternative asset investment strategies. Cerulli predicts that outsourced assets will maintain an uptrend through to at least 2020, which will be good news for asset managers in the region.

Byron Wien Announces Ten Surprises for 2017

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Byron R. Wien, Vice Chairman of Multi-Asset Investing at Blackstone, has issued his list of Ten Surprises for 2017. This is the 32^nd year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.

Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. Byron joined Blackstone in September 2009 as a senior advisor to both the firm and its clients in analyzing economic, political, market and social trends.

Byron’s Ten Surprises for 2017 are as follows:

Still brooding about his loss of the popular vote, Donald Trump vows to win over those who oppose him by 2020. He moves away from his more extreme positions on virtually all issues to the dismay of some right wing loyalists. He insists, “The voters elected me, not some ideology.” His unilateral actions throw policy staffers throughout the government into turmoil. Virtually all of the treaties and agreements he vowed to tear up on his first day in office are modified, not trashed. His wastebasket remains empty.
The combination of tax cuts on corporations and individuals, more constructive trade agreements, dismantling regulation of financial and energy companies, and infrastructure tax incentives pushes the 2017 real growth rate above 3% for the U.S. economy. Productivity improves for the first time since 2014.
The Standard & Poor’s 500 operating earnings are $130 in 2017 and the index rises to 2500 as investors become convinced the U.S. economy is back on a long-term growth path. Fears about a ballooning budget deficit are kept in the background. Will dynamic scoring reducing the budget deficit actually kick in?
Macro investors make a killing on currency fluctuations. The Japanese yen goes to 130 against the dollar, stimulating exports there. As Brexit moves closer, the British pound declines to 1.10 against the dollar, causing a surge in tourism and speculation in real estate. The euro drops below par against the dollar.
Increased economic growth, inflation moving toward 3%, and renewed demand for capital push interest rates higher across the board. The 10-year U.S. Treasury yield approaches 4%.
Populism spreads over Europe affecting the elections in France and Germany. Angela Merkel loses the vote in September. Across Europe the electorate questions the usefulness of the European Union and, by the end of the year, plans are actively discussed to close it down, abandon the euro and return to their national currencies.
Reducing regulations in the energy industry leads to a surge in production in the United States. Iran and Iraq also step up their output. The increased supply keeps the price of West Texas Intermediate below $60 for most of the year in spite of increased world demand.
Donald Trump realizes he has been all wrong about China. Its currency is overvalued, not undervalued, and depreciates to eight to the dollar. Its economy flourishes on consumer spending on goods produced at home and greater exports. Trump avoids punitive tariffs to prevent a trade war and develops a more cooperative relationship with the world’s second largest economy.
Benefiting from stronger growth in China and the United States, real growth in Japan exceeds 2% for the first time in decades and its stock market leads other developed countries in appreciation for the year.
The Middle East cools down. Donald Trump and his Secretary of State Rex Tillerson, working with Vladimir Putin, finally negotiate a lasting ceasefire in Syria. ISIS diminishes significantly as a Middle East threat. Bashar al-Assad remains in power.

Also rans:

Every year there are always a few Surprises that do not make the Ten either because he does not think they are as relevant as those on the basic list or he is not comfortable with the idea that they are “probable.”

Having grown weary of Washington after a year in the presidency, Donald Trump moves the White House to New York from April to December and to Palm Beach from January to March. He makes day trips to the Capitol on Air Force One for legislative and diplomatic purposes.
The Democratic Party is sharply divided on strategy, with Bernie Sanders and Elizabeth Warren arguing for a shift to the left and others wanting to remain in the center. A lack of leadership gives rise to widespread speculation about sharp losses in the 2018 congressional elections.
Donald Trump’s intimidation tactics prove effective in discouraging companies from moving some U.S. manufacturing abroad, but he fails to bring jobs back. The wage differential is just too great. This becomes his biggest first-year disappointment.
Trump’s first major international confrontation comes, not unexpectedly, from North Korea. Kim Jong-un threatens to set off a nuclear bomb in the mid-Pacific, calling it “a test.” Trump’s advisors try to restrain his desire to punish the country severely.
India comes back into the investment limelight. Its economy grows at 7% and corporate profits for established companies are strong. Its stock market leads other large emerging countries, along with China.
Trump’s efforts to get out of the Iran deal fail. The other countries signing the agreement believe Iran’s weapons-grade nuclear production has been restrained and force the U.S. to remain a participant.