Global
Investment Forum
Five-Year
Outlook
2017 – 2022
BMO Global Asset Management 5-Year Outlook 2017-2022Global Investment
Forum
London, England
September 21-22, 2016
Contents
State of the world 5
Editorial summary 3
Annual scorecard: A look back at 2016 4
Our scenarios 8
Slow and steady wins the race 9
Power to the people 15
All pulling together 19
Strategic asset allocation: Over- and under-emphasis tables 20
BMO Global Asset Management 5-Year Outlook 2017-2022Welcome to BMO Global Asset Management’s 5-Year Outlook 2017-2022.
Each year, our Global Investment Forum (the ‘Forum’), attended by a group of BMO’s international
investment leaders and strategists, gathers for two days of intensive briefing, fact finding and debate
stimulated by the input of independent experts including chief economists, investment managers and
academics. Our aim is to lift our eyes from the specific focus of our ‘day jobs’ and consider the wider
investment world to seek out some of the key forces that will drive markets for years to come.
We firmly believe that this era of rapid change offers opportunities as well as threats, rewards as well
as risks. As global investors with responsibility for the stewardship of your capital, we are committed to
sharing our investment insights and expertise with you, our clients and customers. Looking to the future,
we consider a number of likely scenarios and the opportunities that they may bring to your portfolios’
allocation strategies for under- or over-emphasis across asset classes and sectors.
Editorial summary1
In this year's Forum, our discussion identified several
persistent themes and we debated the potential impact of
these forces over a 5-year time frame.
morphing of central banks into quasi-governmental roles, a
potentially new paradigm;
society and a wave of populism and geopolitical disruption
is sweeping across much of the world;
toolboxes, as negative interest rates deliver mixed results
and secular stagnation is becoming a mainstream theme;
robotics is felt on long-standing business models and
global industries;
economies, altering previous assumptions of emerging
versus developed markets;
agreements are being scrapped in favor of selective
arrangements, closed markets and Special Economic
Zones; and
including the migrant crisis; warfare risks in South China
Sea between U.S. and China; and the changing profile of
the Middle East as the powerbase of who controls the
world’s energy supplies fragments, and the range of viable
alternatives for oil widens (shale, LPG, non-fossil fuel, etc.).
Against this backdrop, we have arrived at a strong consensus
regarding a baseline core scenario entitled ‘Slow and Steady
Wins the Race,‘ which focuses primarily on the prospect of
continued marginal incremental improvements in global
economic growth (70% possibility). Our two alternative
scenarios are ‘Power to the People,‘ reflecting the negative
implications of populism and its associated ramifications
(20% possibility); and ‘All Pulling Together,‘ in which
collectivism triumphs and centralized policies are successful,
stimulating global growth (10% possibility).
BMO Global Asset Management 5-Year Outlook 2017-2022Our 5-Year Outlook is a reflection of our
commitment to add value through innovative
ideas, solutions, support and access to the insights
of renowned global thought leaders.
In last year’s scenario casting, we placed a 60% probability of our base case ‘Firing on more than one
cylinder’ occurring over the coming years. On reflection, the key components we identified have, broadly,
so far been correct, albeit with some surprises caused by the surge of populism, a key consideration in our
discussions this year. Key themes continue to evolve as follows:
evidence of a broader distribution of growth, though not yet
to the degree that we had anticipated. The U.S. continues to
lead the expansion, while Japan and Europe are showing some
signsof improvements.
tailwind for a number of energy-consuming countries.
However, not everybody benefited as responses differed
regionally. In the face of lower oil prices, the U.S. consumer
acted unexpectedly, continuing to save and not spend, as
seen in improving personal balance sheets. Also, the initial
impact of lower energy-related capital expenditure had an
immediately negative impact that was not offset by a typical
U.S. consumer-led response to lower energy costs. Europe saw
some expansion in consumer numbers, although in China, the
benefits did not flow down to the consumer but stayed up at
the state level.
particularly where there is a high sovereign debt to GDP ratio
and it continues to be a drag on growth potential. However, it is
important to note that, consistent with our view coming out of
our 2015 Forum, elevated debt levels remain a concern, but that
there is a broader consensus that debt levels are sustainable
for the foreseeable future, barring an unanticipated spike in
interest rates.
that spot on. We also thought housing prices would stay firm,
and they picked up a little over the course of the year.
contain a crisis; GDP growth has slowed but without the hard
landing many feared. We were right to highlight India as the
BRIC nation that would disappoint the least.
although the shocking UK referendum decision was not
anticipated and the long-term disruption remains unknown.
If we look at what we said regarding asset allocations, we
suggested under-emphasizing Canadian equities until the oil price
was firm. Subsequently, we increased our Canadian equity rating
late last year because we felt that oil prices had at last bottomed,
moving into a position of over-emphasis. So we got that one
correct too. Last October, we rightly suggested over-emphasizing
the following sectors: consumer discretionary, IT and industrials.
Additionally, we recommended an overweight in India, where
equities have done better than in some developed markets.
However, under-emphasizing precious metals was not the right
call in the last 12 months, and energy has been stronger than
expected in the Canadian market.
On currencies, we predicted that the U.S. dollar was to be over-
emphasized and it has strengthened overall. The U.S. dollar has
had a volatile time, however, rising a little against the euro but
weakening versus the yen.
Annual scorecard: A look back at 20162
BMO Global Asset Management 5-Year Outlook 2017-2022After eight years of growth (albeit moderate), and with signs of
tightness in the labor market and deterioration in productivity, the
U.S. economy appears to have entered the mature phase of the
business cycle. But what are the prospects from here
In the immediate term, there are some grounds for optimism.
The U.S. is close to full employment, so modest wage rises are a
possibility and these could support consumer sentiment and filter
through into slightly higher inflation. Additionally, the impact of
dollar strength is fading, and there is scope for profits to improve,
so companies (unable to continue hiring so freely) could well
increase capital expenditure.
Currently, the rate of expansion in the U.S. stands at around 2%,
but longer term, there’s an argument that secular themes could
depress growth to around 1.5%. First, technology-related gains
in productivity are moderating. Second, lower birth rates are
combining with an aging demographic to reduce the size of the
working population.
Europe’s economy is muddling through. Given its inherent
diversity, it should be of little surprise that the region is
characterized by marked divergence between the economic
fortunes