John Hancock 2017 Outlook

John Hancock Investments

Flexibility Will Be Key to Adapting to Change in 2017Flexibility Will Be Key to Adapting to Change in 2017

The general sentiment from John Hancock Investments is that the economy is likely to go from a yellow light to a green light in 2017, but there are many factors that could shift things in a variety of directions.

“Flexibility is going to be the key as we move into 2017,” says Matthew Miskin, the firm’s senior capital markets research analyst. “With so many variables in play, advisors would be wise to leverage a strong, fundamentals-based core that is easily adapted to change.”

Adds Steve Deroian, John Hancock Investments’ head of ETF strategy, “What everybody is expecting to happen won’t necessarily come true, so managing client expectations will be half the battle.”

John Hancock Investments partners with Dimensional Fund Advisors to bring a manager-of-managers approach to the ETF market, using a multi-factor, strategic beta lineup that enables advisors to leverage the goals of both active and passive management.

The market was already on an upswing, and then it got another marginal boost after the election in anticipation of tax cuts, fiscal spending, and deregulation. With that in mind, here are five key factors John Hancock Investments believes will drive investment decisions heading into the New Year:

1. Bond yields are likely to continue to push higher. High dividend-paying parts of the market and low volatility factor exposure are still relatively overvalued. If bond yields do continue to rise, it’s likely they will see mounting headwinds. If that does happen, it will likely make more sense to tilt portfolios to stocks on the value side of the style box

2. The healthcare sector may start to prove its worth. The healthcare sector was one of the worst performers in 2016, but it appears investors were reacting to the uncertainty of how a new administration will impact the industry than on any lack of sound fundamentals. That fact creates a lot of unrealized value. While the fate of Obamacare and the threat of price regulation have scared many investors away, John Hancock’s bottom-up managers are anticipating high single digit earnings growth across the sector in 2017. Aging baby boomers aren’t going away, and the Trump administration face’s a significant uphill battle when it comes to price regulation. The result: there are more positive indicators than negative, which makes healthcare a potential buying opportunity for long-term investors.

3. International equities are poised to unlock value. There’s no doubt that international equities deserve a certain level of allocation in portfolio, and relative to global market capitalization, many advisors are finding themselves underweighted in this important asset class. “Expectations for international equities are very low at the moment,” says Miskin, “so almost any good news has the potential to unlock value.” By adjusting your allocations now, you can be positioned to take advantage of the shift when it happens.

4. Emerging markets are likely to be re-rated. Another victim of headline risk, emerging markets suffered in the fourth quarter in response to news of political and economic uncertainties—all against the backdrop of a stronger US dollar. But earnings in emerging markets are likely to continue to improve into 2017. Better underlying corporate fundamentals is why emerging markets may reverse recent losses to add value in the coming year.

5. Fixed income may continue to face headwinds. 2016 brought massive inflows into retail fixed-income products in 2016. While the desire to use fixed-income as a hedging tool makes sense, “the fact that investors seem to be flocking to passive fixed income in a rising interest rate environment has a lot of us scratching our heads,” says Miskin. Since it’s anybody’s guess what will happen in the asset class, taking an active approach is likely the best option. One option: find strategies that can complement portfolios with allocations to lower duration sectors away from the benchmark.

Miskin and Deroian both stress that the most challenging aspect of portfolio management in the coming year is going to be adapting to change. “People get used to thinking a certain way, and advisors and clients alike have gotten very comfortable in a low interest, low inflation world.” says Miskin, “But that world may change and fast.”

Start by doing your homework, then think through how to manage your clients’ expectations. To support that communication, take an approach that makes good sense to you, that your clients can understand and, most importantly, that you won’t have to apologize for if things don’t go as expected. “Communicating your trust in the efficiency of the market is key,” says Deroian. “If your clients know up front that your approach is scientifically sound and based on historic and academic rigor, they’ll be willing to accept the outcome—no matter how unpredictable the market may be moving forward.”

Click here to visit the 2017 Market Outlook Channel home page.

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