A pro-risk investment strategy with a diversified approach makes sense in today’s markets. Here’s how to put it to work.

There is a palpable enthusiasm that 2017 will be a strong year for markets. The Trump administration’s policy focus on taxes, regulation and fiscal spending is expected to create growth. Signals of expanding U.S. economic activity have emerged, and the pickup in growth is global.

Pro-Risk Investment Strategy
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Pro-Risk Investment Strategy

But we can’t forget issues that defined the market before the election. Equity markets in general, and U.S. stocks in particular, have risen consistently since 2009 so it would be reckless to ignore the risk of a correction. More importantly, risky assets have enjoyed the tailwind provided by central banks, but that may be slowing down. Lastly, risky assets have not responded well to a strong U.S. dollar in recent years — and all signs point to a strong U.S. dollar.

Considering all of these things, a diversified risk-taking strategy makes sense as 2017 begins. We continue to advocate for global orientation for stocks and the incorporation of diversifying investments.

Here are five ways to implement this strategy:

1. Focus on emerging market stocks

For the first time in four years, emerging markets are expected to generate more growth than developed markets, as Brazil, Russia and Argentina recover from recessionary levels. Stabilized commodity-producing economies and slightly better demand for emerging market exports are likely to contribute to that growth.

Economic fundamentals are slowly improving in emerging markets, with positive current account balances for the first time in countries that import commodities, excluding China. Lastly, while U.S. stocks seem expensive, emerging market equities are still relatively cheap despite an 11% rise in 2016.

2. Tilt toward Japan for developed market stocks

We are beginning to see the effect of the Bank of Japan’s (BoJ) newly introduced yield curve management strategy. Since the beginning of the fourth quarter, global yields have risen and the BoJ has increased its bond buying to maintain yield levels near zero. This has helped devalue the yen. In addition, recent dollar strength has further weakened Japanese currency, resulting in better earnings growth for Japanese equities. Japanese equities continue to be a good value.

3. Invest in commodities

The energy sector had strong returns last year, with the outlook for growth improving. But the asset class has room for further gains, as commodities (as measured by the Bloomberg Commodity Index) remain near the bottom of their long-term trading range.

4. Include an absolute return strategy

Absolute return strategies may offer a better return than fixed-income assets right now, particularly government bonds. Despite the recent rise in fixed-income yields, U.S. government bonds are still overvalued.

5. Have exposure to the U.S. dollar

2017 represents a year of interesting possibilities for the dollar. If even a fraction of the Trump administration’s proposals are implemented, we expect the dollar to appreciate relative to most developed market currencies.

The expectation for a stronger U.S. dollar may seem contradictory to our recommendation for commodities and emerging markets. In the past, these things have had negative correlations — when the U.S. dollar has gone up, commodities and emerging markets have gone down. However, correlations are dynamic. We may be entering a period where historically negative correlations change.

Bottom line

Pro-growth change in Washington and evidence of expansion around the world favor a risk-oriented investment strategy, as long as it is diversified.

Article by Anwiti Bahuguna – Columbia Threadneedle Investments