As always, we will first take some time to review last year’s predictions and see how they have matched up against the actual outcomes. For the details, we refer to our Investment Outlook 01.2016.

1. Growth
We correctly forecasted the gradual increases in growth. US growth, according to the latest estimates, is likely to stay slightly below our 2% expectations, Eurozone growth estimates are at 1.6% vs our expectations of 1.7%, and Japanese growth exactly equals our forecast of 1%.

2. Inflation
As expected, we observed a mild pickup of inflation rates and a correction of ultra-low inflation expectations. Inflation expectations rose more meaningfully especially after the US elections.

3. Central Banks
We expected the Fed to hike two to three times in 2016. However, the Fed decided to hike only once, in December. We were right to state that the ECB would keep its policy stance. Rates remained unchanged, while the QE program was somewhat extended during the year.
As expected, the Bank of Japan (BoJ) decided on additional monetary policy measures. For example, the BoJ introduced a direct targeting of 10Y government bond yields. The BoJ succeeded in stopping the appreciation of the JPY, which changed course in Q4 and weakened significantly.

4. Rates
We were spot-on with our forecast for US 10-year treasury yields, which for most of December 2016 traded within the forecasted 2.5-2.6% range. But while we predicted higher European rates, these fell further, even down to -0.2% in July, ending the year at 0.2%, which was about 0.18%-points lower than at the end of 2015.

5. Credits
In contrast to our predictions, credit spreads tightened and credits in general performed positively. The riskier part of the bond universe, like high-yield and emerging markets, even performed very strongly.

6. Equities
We were right in our prediction that equities would yield single-digit returns. However, in contrast to our expectations, Europe and Japan underperformed clearly. We rightly foresaw opportunities in the commodities space, the sector which clearly outperformed last year.

7. Emerging markets
Emerging markets were quite volatile in 2016, so our cautious stance at the beginning of that year was right. During the course of the year emerging market assets recovered noticeably and EM equities yielded a healthy 8.6%, despite a setback after the US election.

8. Commodities
While we anticipated an upturn in commodity prices, we started the year with a cautious stance and expectations that the recovery would come later and would be more gradual. We were, however, surprised by the steepness of the rally after February, which was led by industrial metals, energy, and also gold.

9. Alternatives
We looked for some diversification in the portfolio and added absolute return strategies. While we still believe that this helps to improve risk-return, the broad hedge fund index gained only 2.5% in 2016 and fell somewhat short of our expectations.

10. Currencies
As far as currencies are concerned, we were right that the USD would somewhat strengthen vis-à-vis EUR and JPY, which it did, by 3.2% and 2.7% respectively.
We expected that the CHF would weaken against the EUR, which it did in the first half of the year. However, after Brexit, the CHF strengthened again and gained about 1.5% vis-à-vis the EUR if you compare end of December values.

1. Growth
In 2016 most growth indicators clearly improved. Taken together with expectations of a strong fiscal stimulus in the US and a more business-friendly US policy – if we exclude public shaming of individual companies and protectionism – this leads to a brighter growth outlook. We expect the US to grow by 2.0%, the Eurozone and Japan by about 1.5%, and China by about 6.5% in 2017.

2. Inflation
Inflation rose somewhat in 2016, albeit from very low levels. As we slowly leave a deflationary environment we are not excessively concerned about any possibility of massive inflation overshoot. However, since interest rates are still at historically low levels, additional fiscal stimulus, rising commodity prices, and tightening US labor markets will most likely lead to higher US inflation. The inflation outlook in Europe, however, is very different. A weaker EUR and rising commodity prices will help inflation rates to grind only a little higher. We expect US inflation to rise towards 2.5% and European inflation towards 1.7% in 2017.

3. Central Banks
We expected the Fed to hike twice in 2017. The reflationary policy of president Trump and the low unemployment rate — full employment was almost reached — are likely to put the Fed under pressure to increase rates. However, we expect that the majority of monetary tightening will come via a stronger USD, which limits the Fed’s ability to raise rates by too much.
The ECB announced it would start reducing its asset purchase program, starting in April 2017. This will be a gradual process but we still remember well the taper tantrum of 2013, when Fed president Bernanke’s announcement triggered a major sell-off of bonds.
The Bank of Japan, however, appears very committed to extending its easing program until inflation moves up noticeably. It may even let inflation overshoot.

4. Rates
Rising inflation, more Fed hikes, and the ECB reducing its asset purchase program lead us to expect that bond yields will rise in 2017. Since central banks are unlikely to become very aggressive, inflation is unlikely to rise by too much, and investors’ sentiment is very likely to remain cautious, we do not expect a dramatic bond sell-off in 2017. We prefer inflation-linkers since they provide some protection against rising inflation expectations.

5. Credits
We expect credits to do well in general. While high-grade credit is most likely to suffer from rising rates, we see positive return potential for high-yield bonds. We have scaled back our high-yield exposure, though, based on more challenging valuations and, at least in the US, a rise in corporate balance sheet leverage.

6. Equities
We remain constructive on equities in general, based on the brightened growth outlook, further monetary and additional fiscal stimulus, which will be coupled with a better outlook for earnings. However, relatively high valuation will limit the return potential, which will remain in the single-digits. At the start of the year we favor the US, Japan and emerging markets over Europe. Rising US yields, and a stronger USD are major downside risks for US equity. Various elections in Europe and anti-EU forces are major downside risks for European equities. As the Trump administration is likely to change global geopolitics, this may also create uncertainties.

7. Emerging markets
The outlook for emerging markets is not clear-cut for us. Negative for emerging markets are a strong USD, rising US yields, as well as Trump’s protectionist rhetoric. Positive is the recovery of commodities, and more global growth. China is likely to maintain stimulus spending in the run-up to the Communist Party Congress in autumn, but may reduce it thereafter.
Overall, we are cautiously positive for emerging markets equities in 2017. Emerging market bonds will benefit after net issuance in 2016 and starting easing cycles in many countries.

8. Commodities
The oil market recovered in 2016 from a very depressed status. The market is, however, still faced with large overcapacity. Oil prices have been supported recently by OPEC’s announced intention to cut production. The question that remains is how credible this is. Still we expect oil prices to stay stable in 2017 and gradually move higher in the course of the year.
Somewhat rising Chinese demand and stronger US infrastructure spend has initiated a strong rally of industrial metals. We think the market may have run ahead of fundamentals and we would not be surprised by a technical correction. In general, we think that the multi-year bear market for industrials may be over and expect a mildly positive year.
Gold was very volatile last year. We remain skeptical about the outlook for Gold in an environment with rising real and nominal yields. Gold may, however, serve as a hedge in a very uncertain world. We expect the Gold price to end the year between 1,000 and 1,200 USD/oz.

9. Alternatives
In a world with low return expectations for bonds and equities, we still like the diversification effects from alternative non-directional investment strategies. For investors who can accept lower liquidity, private equity can provide additional attractive risk-return.

10. Currencies
We see further upside for the USD, as rate differentials may increase further in 2017. The EUR could come under pressure as major European elections approach. We expect a weaker JPY due to aggressive Bank of Japan easing, a weaker CNY due to Trump’s trade rhetoric and rising yields, and a weaker GBP due to a high likelihood of a hard Brexit.

US policy
Potential risks are related to a protectionist, “beggar-thy-neighbor” policy by the new Trump administration. This could disrupt trade and established business value chains, dampening growth, and driving inflation up. It remains to be seen to what extend the US president will finally implement his policy intentions.

European populism
Populism and nationalism are on the rise globally. In Europe this threatens the stability of the European Union. In 2017, major elections take place on 15 March in the Netherlands, on 23 April in France, and probably on 24 September in Germany. If anti-European parties were to gain support, this could trigger further referendums in 2018 as well as greater concern about the sustainability of the European Union. As a result, we need to prepare for a prolonged negative impact on European equity markets.

China
The fact that Trump’s rhetoric has been very critical regarding China could disrupt the strong trade links between the two countries. A strong USD and rising yields are weakening the CNY. The Bank of China has spent about USD 1 trn for currency market interventions to stabilize the CNY.
Furthermore, the ongoing territorial dispute concerning the South Chinese sea could heat up. In addition, the upcoming 19th Communist Party Congress in autumn, with far-reaching changes in the leadership of the party, could potentially lead to heightened uncertainties.

Middle East and global Terrorism
It remains to be seen how a US administration, which on the one hand puts out a harder rhetoric against Islam but on the other hand wants to reduce its international military engagements, will impact developments in the middle east. In addition, the balance of power between the US and Russia does have a strong impact on the region. For us, it is completely open how the relationship between Trump and Putin will develop and how this will impact the various forces in the middle east.

Valuations
Equities and credits are richly valued. While the still ultra-low rates and an improving growth are likely to support risky assets, the market may start to become concerned about stretched valuations.