The landscape for investors and financial markets is shifting, according to a new Janus report.
Janus Capital Group released its investment outlook for 2017, Janus Market GPS 2017, on Wednesday.
“Stable energy prices, renewed optimism about the U.S. economy and ongoing innovation suggest that new opportunities lie ahead,” the report states. “Meanwhile, for the first time in years, inflation appears to be rising, while China, once the engine of the global economy, grapples with slower growth.”
In the report, investment professionals at Janus shared insights on five trends that they believe will be key considerations for investors in 2017.
1. China’s Credit Bubble
By 2020, Janus projects China will hold almost 30% of global nonbank and corporate and household debt.
China’s share of global gross domestic product has risen to more than 13%, much of which has been fueled by rapidly expanding private-sector credit.
While Janus says China’s credit bubble is not to be taken lightly, the firm also believes it does not pose an immediate threat. In Janus’ estimate, the economy can be controlled internally for three to five more years.
The core of the issue is China’s ongoing policy conundrum, according to Barrington Pitt Miller, an equity research analyst at Janus.
The country has targeted economic growth of 6.5% to 7% annually for the next five years, while also striving to maintain full employment and reduce leverage.
In Pitt Miller’s view, a reduction of the growth target is highly unlikely because social stability is a major concern for the central government. Less growth would mean fewer employed people and could potentially lead to unrest.
In recent years, growth and employment have been sustained through credit and fiscal stimulus.
“There is a fundamental disconnect between the central government’s GDP ambition and its leverage rhetoric,” Pitt Miller said. “Until the economy transitions sufficiently, China cannot slow leverage and achieve the current GDP target. Those two objectives cannot coexist.”
Wages, which are a key source of inflation in service-based economies, averaged more than 2.5% growth year-over-year in 2016, according to Janus’ report.
“That upward pressure, along with post-election stimulus expectations, caused the [Treasury inflation-protected securities] market to raise its inflation expectations,” the report states.
Inflation expectations, which began changing after June’s Brexit vote, have been significantly amplified in the wake of the U.S. presidential election, Janus reports.
Ashwin Alankar, global head of asset allocation at Janus, notes that markets indicate a Trump presidency will be inflationary despite a stronger dollar. The options markets signal continued U.S. dollar strength.
“We see inflationary forces despite a stronger U.S. dollar,” Alankar says in the report. “Inflation will be ignited by domestic spending. We expect the consumer will start to spend and a little pickup in the velocity of money will put the tremendous supply of money to use.”
Janus believes the fear of future expenses will motivate current spending, leaving the U.S. consumer as the driver of upward price pressures. In addition, an increase in the velocity of the massive U.S. money supply will also translate to inflation.
The global economy could benefit as well as other countries import inflation through a stronger dollar, according to Alankar.