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Mid-Year 2017 Survey: Geopolitical Risk, Political Gridlock Are Top Concerns


When we reached out to clients to conduct our 2016 Year-End Survey, it was in the midst of the US presidential election, and respondents told us that volatile markets, a slowdown in US earnings and political gridlock were their top concerns heading into 2017. In early May, just after the 100-day mark of the Trump administration, we checked in again to see how their 2017 expectations have shifted and how they plan to adjust portfolios.

The following charts reflect what we learned from the more than 700 clients who participated in our 2017 Mid-Year Survey.

Top concern at mid-year: Geopolitical risks

While stock market volatility ranked first among concerns at the end of 2016, our Mid-Year Survey showed that geopolitical tension rose to the top of the list. Concerns around DC gridlock also increased as the initial post-election optimism that was driven by expectations of a market-friendly, Republican-controlled agenda has subsided. Fears that the new administration may be more about “the art of damage control” than “the art of the deal” drove the percentage of advisors concerned about DC gridlock to 70%. 


Source: State Street Global Advisors’ “2017 Mid-Year Survey,” as of 5/2017


Asset allocation trends: Going international

Respondents are taking a decidedly more risk-on tone toward European equities after Emmanuel Macron prevailed over his right-wing opponent Marine Le Pen in the French election. Today, only 6% do not expect to seek European or broad developed ex-US exposures this year. That is a dramatic change from the 26% who stated at the end of 2016 that they did not plan to allocate to any international equities.

This shift has been even more pronounced for emerging markets. At the end of 2016, 39% of respondents expressed no affinity for the asset class. Today, 93% expect to allocate to emerging markets in the second half of this year.

Given concerns around political gridlock and stretched US equity valuations, allocations to the US large-cap space are forecasted to stay largely unchanged. Almost 100% expect some exposure to large-caps, but 74% are keeping their weighting to the space unchanged.

While this strategy may help investors from missing out on potential gains and avoid putting all their eggs in one basket, there still may be further opportunities to explore within the US large-caps space. A tactical sector and industry rotation strategy to potentially improve the balance of risks and rewards within their US equity core may warrant consideration.



Source: State Street Global Advisors’ “2017 Mid-Year Survey,” as of 5/2017


Sector investing intentions

We are seeing sector cyclicality play into sector weighting intentions. At the start of the year, financials were the most over-weighted sector. But with the outlook for financials cooling as “Trump Trades” fade, technology is now the most favored sector—a reflection of its strong earnings and growth prospects. 57% of respondents are overweighting technology, a 6% jump from the start of the year. Energy saw the biggest pullback in expected weighting, with just 27% overweighting the sector, down 9% from our last survey.

Meanwhile, smart beta strategies continue to gain traction. Today, 68% said they plan to use smart beta—a 10% point jump since the end of 2016. Smart beta use has nearly tripled since our 2016 Mid-Year Survey, when only 25% expressed interest.

We also see respondents remaining fairly consistent in which factors they seek to target. 20% are seeking exposure to value and dividends, while just 6% indicated they are seeking a size exposure. 


Source: State Street Global Advisors’ “2017 Mid-Year Survey,” as of 5/2017

The forecast calls for a stalled US market

Given the political environment, many expect the markets may succumb to gridlock, and most do not anticipate big moves.

42% expect the S&P 500® Index to be between 2,400-2,500 at year end, implying limited upside from its current level of 2,415.1 Meanwhile, 25% of respondents see the 10-year Treasury yielding under 2.5% in 2017—the majority of our respondents at the end of 2016 thought yields would end 2017 above 2.5%, a higher rate but by no means at nosebleed altitudes. 
  




Source: State Street Global Advisors’ “2017 Mid-Year Survey,” as of 5/2017


Investment strategies for the second half of 2017

Given pervasive uncertainty, top considerations are generating total return, protecting principal, mitigating volatility and keeping costs low. We believe this can be best attained by:

  • Seeking income at a reasonable risk by going active in fixed income and favoring floating over fixed rate solutions for adaptability in a volatile rate environment
  • Looking outside the US to find growth exposures at a reasonable price, while mitigating risks by utilizing a multi-factor smart beta approach
  • Minimizing volatility by ensuring proper diversification, with portions of portfolios carved out for risk mitigating assets like gold

1Bloomberg Finance L.P., as of 5/26/2017

Survey Methodology
A total of 721 investment professionals completed State Street Global Advisors' online midyear survey, the goal of which was to determine the investment concerns and client portfolio considerations that were top of mind for investment professionals. The survey was fielded in May 2017. Respondents represented a variety of investment professional segments, holding a wide range of assets under management.

Definitions

S&P 500 Index
The S&P 500, or the Standard & Poor’s 500, is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

Smart Beta
Smart beta defines a set of investment strategies that use alternative index construction rules to achieve outperformance over first-generation market capitalization based indices. Smart beta indices isolate six particular “factors”—small size, value, high yield, low volatility, quality and momentum—and are again designed to deliver better risk-adjusted returns than cap-weighted indices.

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