Lazard Multi-Asset Team
MAR
Letter from the Manager
2017
Changes to the Market Forecast (22 March 2017)
In this letter, we discuss recent developments behind the latest changes to our team’s market forecast. Our multi-asset portfolios
reflect our assessment of the global economy and the investment landscape six to twelve months into the future.
Current Market Forecast (Probabilities)
Deteriorating
conditions
12%
No
change
Slow, uneven
growth
50%
Up 5%
Bear
Sustainable,
healthy growth
31%
Down 5%
Overheating
conditions
7%
No
change
Base
Bull
Our Market Forecast is based on an evaluation of returns and risks across four subject areas: the macro Economy, asset
Valuation, market Liquidity, and investor Sentiment. Our process assesses the future state of each area and assigns probabilities
on a forward-looking six- to twelve-month basis to potential outcomes ranging from bearish to bullish.
We are becoming somewhat more cautious about market conditions as the end of the first quarter approaches. At the time of
our last Changes to the Market Forecast (25 January), global markets were anticipating significant fiscal stimulus—in the form
of regulatory and tax policy changes—emanating from the United States. A unified government made execution risk appear
low. But, two months into the new president’s term, challenges to this orthodoxy are now being felt as efforts to repeal the
Affordable Care Act reveal deep divisions, raising the prospect of an extended delay of the most growth-enhancing elements of
the policy agenda. Europe faces the reality of Brexit once Article 50 is triggered by the United Kingdom on 29 March, which
is adding further political uncertainty and offsetting generally more positive economic data from the region. Emerging markets
have performed well, helped by a weaker dollar since the beginning of the year.
Economy
What stage of the global business cycle are we likely to be in over the next six to twelve months?
Depression/
recession
12%
Down 1%
Below
trend
47%
The United States is beginning to yield its role as the sole
leader of the global economic recovery. Recent economic
reports have exceeded estimates, but have also been
boosted by seasonal adjustments that overcompensated
for a much warmer-than-usual winter. Meanwhile, the
US Federal Reserve has raised its forecasts for 2017–
2018 and there is more support for a heightened pace
of interest rate normalization. Outside of the United
States, business conditions have improved in Europe and
Japan, partly due to creative monetary policies that have
contributed to loan growth and rising consumption and
investment. We expect that authorities in China will
maintain a stable outlook throughout 2017.
RD22807
Down 1%
Stable
growth
35%
Up 3%
Overheating
6%
Down 1%
Business Conditions Have Improved In Europe, Japan, and China
Manufacturing Purchasing Managers Index
56
Europe
Japan
53
China
50
47
Apr
2016
Jun
2016
Aug
2016
Oct
2016
Dec
2016
Feb
2017
As of 21 March 2017
Source: Lazard, Bloomberg, China Federation of Logistics and Purchasing, Markit
2
Valuation
How attractively valued are risk assets likely to be over the next six to twelve months?
9%
Broadly
undervalued
No
change
Mostly
attractively
valued
57%
29%
Fewer
attractively
valued
Up 8%
Down 8%
5%
Broadly
overvalued
No
change
Recent reports on job creation appear better statistically because of a mild winter that allowed for greater participation than normal.
We expect a correction to this trend over the next few months, which could lead to heightened concerns about the widely anticipated
acceleration of economic activity. Job openings and the quits rate remain elevated, especially at the low end of the pay scale. These
factors reflect tightening conditions that suggest employers are already paying up to retain their best workers and are looking for ways
to pass on the costs. Although commodity inputs remain broadly under control, we expect that the Fed is more interested in labor cost
trends, and thus earnings gains are likely to be somewhat offset by lower multiples (at least in the United States).
Liquidity
How likely will borrowers be to find lenders and vice versa over the next six to twelve months?
Very
weak
5%
No
change
Weak
52%
Up 10%
Liquidity trends remain broadly supportive globally, especially
when considering the extent of accommodative central bank
policies. In Japan and Europe, private lending is recovering
from depressed levels. But while we had been anticipating an
acceleration in commercial bank lending in the United States
(based on robust gains in business and consumer confidence
since the election and on prospects for lighter regulation), this
improvement has yet to materialize. Recent data show reduced
lending, possibly due to higher rates.
Controlled surveys of consumer confidence suggest improving
sentiment may be concentrated among those who already had
access to credit, while uncertainties about new policies may be
constraining new credit demand among some groups.
Sentiment
Normal
38%
Down 10%
5%
Very
strong
No
change
US Loan Growth Has Slowed Down
US Commercial Bank Assets, Loans & Leases
Y/Y Change (%)
24
12
0
-12
-24
2001
2005
2009
2013
2017
As of 21 March 2017
Source: Lazard, Bloomberg, US Federal Reserve
How supportive will politics and/or public opinion be to capital markets over the next six to twelve months?
Not at
all
22%
Up 2%
Somewhat
44%
Up 1%
Very
24%
Down 2%
Too
much
10%
Down 1%
Investor flows and demand for high profile IPO deals suggest that confidence is reaching a euphoric state in some areas of the market.
Meanwhile, we remain concerned about geopolitical risks in the Middle East and North Asia. The politicization of the flow of refugees
toward Europe and the United States—with increasingly antagonistic rhetoric between the European Union and Turkey—threatens
the underpinnings of multilateral agreements and institutions. In the United States, progress toward stimulative tax reform is
complicated by an overfull legislative agenda and rifts over the national approach to health care.
Current Six- to Twelve-Month Global Market View
We believe the recent theme of global economic recovery co-existing with significant political uncertainty is likely to continue. Meanwhile, market
volatility remains low, which has led to more demand for risk assets. However, this may not be justified by the reality of the US and European
political environments. Business activity in Japan looks firmer, especially in the export sector. We expect China to post solid growth in line with the
more rational growth levels being targeted by leadership. Trade policy issues and continued dollar strength were a significant exogenous concern
for emerging markets. However, obstacles have arisen to proposals for sweeping changes to shrink the US trade deficit, China is not likely to be
designated a currency manipulator, and commentary around a Trump–Xi summit is (so far) constructive. As investors, we are locking in profits from
some of the recent strong pricing activity and pivoting to areas of the market that have greater valuation support or clearer macro-political scenarios.
Favor
Avoid
• Non-US equities
• Economically-sensitive US equities and bonds
• Non-US small mid-cap equities
• Energy-related corporate bonds
• Medium-longer duration bonds
Letter from the Manager
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.
Important Information
Published on 24 March 2017.
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