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Schwab Global Strategist Encourages Investors to Stay Invested in 2017 Despite Heightened Global Uncertainty

Charles Schwab Hong Kong
2017-04-06 12:30 3592

HONG KONG, April 6, 2017 /PRNewswire/ -- Despite heightened political uncertainty, the Fed raised its benchmark interest rate again in March and U.S. stocks continue to enjoy remarkable post-election gains. Against this backdrop, investors should "stay invested" advised Jeffrey Kleintop, Senior Vice President, Chief Global Investment Strategist of Charles Schwab & Co., Inc. at a press conference today in Hong Kong.

"Although the fear of uncertainty reflects the potential threat posed by policy risks to future growth, economic and profit growth continue to improve in the near-term and support stocks. Adding on to that, low chance of recession, improving growth, positive economic surprises, recovering earnings estimates and a return of investor buying are strong reasons why investors should stay invested," said Kleintop.

Yield curves indicate the chance of a global recession in 2017 is fairly low. Further, the odds have been declining in recent quarters as global growth and inflation have re-accelerated. Nominal GDP growth may exceed 5% in 2017 for the first time in six years, helping the sales of global companies to grow for the first time since 2012. Kleintop noted that the economic data from around the world continues to exceed economists' estimates. More than just an election-driven rally, stocks have been mirroring the trend in data versus expectations for the past year, rather than reacting to policy uncertainty.

"In response to improving global economic data, analysts have been raising their earnings per share expectations for global companies. While still below prior peaks, earnings estimates have been improving and helping to lift stocks. The return of inflation in 2017 may help to lift sales for global companies, bolstering business leaders' confidence and spending," asserted Kleintop.

Kleintop suggested that investors may expect key votes in 2017 to mirror the surprise political outcomes of 2016. However, the outcomes are likely to be different as key issues fade that have fueled anti-EU sentiment. Rising trade frictions are likely, but a trade war is likely to be avoided.

On the U.S. front, economic data have improved alongside the prospect of a business-friendly Trump administration, helping to bolster both stock prices and Treasury yields. Although bouts of volatility and market pullbacks should be expected, improving earnings growth and stronger U.S. equity fund flows should keep the bull market alive in 2017. "We believe developed market international stocks may underperform U.S. stocks over the next six to 12 months due to concerns about political risk in Europe and expectations of relatively stronger U.S. growth accompanied by a firm dollar," said Kleintop.

Additionally, the Fed signalled willingness to continue to hike rates in the coming months, which would mark the first time we would see more than one hike in a year since the financial crisis. Kleintop reminded that the market may be at risk if the Fed has to significantly accelerate its hiking campaign, but for now, markets are taking it in stride and remain calm.

No one knows for sure how the UK's exit from the EU will unfold or how long it may take for the UK to form new relationships. But it poses a risk for investors even in the near-term since the potential for major changes can have a negative economic impact. When the UK entered the precursor to the EU in January 1973, the economy quickly slipped into a recession. Kleintop highlights the risk by noting, "In the real world, we're already seeing UK households cut back their borrowing and spending as they prepare for the worst." Yet, according to the UK yield curve, the odds of a recession in the next 12 months in the UK are currently 30-40%, based on 50 years of history. Kleintop points out that "If short-term interest rates in the UK rise relative to long-term rates it would be a sign of deepening concern, and rising probability of a coming recession that could negatively affect global stock prices."

Increasing trade frictions are likely, with the U.S. potentially imposing a few tariffs accompanied by retaliatory responses by China, but a trade war remains unlikely. The U.S. is much less dependent on global trade with exports accounting for about 13% of U.S. GDP, compared with 22% for China. But, exports as a share of the Chinese economy have dropped by nearly half since the global financial crisis, while exports' share in the U.S. economy have climbed to near all-time high levels. Kleintop sums up by concluding, "Major trade disruptions would hurt both countries." Fortunately, he notes that there is a less-discussed possibility for cooperation rather than conflict. For example, the U.S. has been losing market share in China's high-tech imports in part due to U.S. restrictions suggesting one way to lower the trade imbalance is for the U.S. to open up more high tech products to China.

Rate hikes by the Federal Reserve put pressure on the People's Bank of China to respond to manage the currency and capital flows. The slowdown in government infrastructure spending is being offset by a revival of housing construction, which is vulnerable to rate hikes. Additional Fed rate hikes in 2017 may put increasing strain on China and revive worries about growth, currency and capital flows as tough trade negotiations near, threatening a return of global stock market volatility.

"The fear of uncertainty reflects the potential threat posed by policy risks to future growth, but economic and profit growth continue to improve in the near-term and support global stock markets. We believe diversified strategy with a global perspective that incorporates portfolio allocations to U.S. and international stock markets along with global benchmarks for performance are vital to successful long-term investing," concluded Kleintop.

Important Disclosure

Investment involves risk. Past performance is no indication of future results, and values fluctuate. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

This material is issued by Charles Schwab, Hong Kong, Ltd. and has not been reviewed by the Securities and Futures Commission in Hong Kong.

(0417-XG1N)

About Charles Schwab Hong Kong

Charles Schwab, Hong Kong, Ltd., is a subsidiary of Charles Schwab Corporation and is registered with the Securities & Futures Commission ("SFC") to carry out the regulated activities in dealing in securities and advising on securities under CE number ADV256. The company currently provides services via its Hong Kong office, its telephone system (+852 2101-0511) and web site (www.schwab.com.hk). 

About Charles Schwab Corporation

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 335 offices and 10.2 million active brokerage accounts, 1.5 million corporate retirement plan participants, 1.1 million banking accounts, and US$2.78 trillion in client assets as of December 31, 2016. Through its operating subsidiaries, the company provides a full range of wealth management, securities brokerage, banking, money management, custody, and financial advisory services to individual investors and independent investment advisors. More information is available at www.schwab.com and www.aboutschwab.com.

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Source: Charles Schwab Hong Kong
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