Editors' pick: Originally published Nov. 21.
Divergences across economies are creating long- and short-term investing opportunities across global markets, said Sinead Colton, head of investment strategy at Mellon Capital.
What's ahead? "Potentially higher growth in the U.S. on the horizon due to looser fiscal policy, and possibly tighter monetary policy, ongoing [quantitative easing] in the eurozone, the UK grappling with the implications of Brexit, Japan continuing Abenomics with new efforts to raise inflation," said Colton. "Some themes are likely to have a more immediate impact, some will be more long term, with different potential ramifications and time frames across equities, bonds and currencies.
Colton said U.S. stocks should benefit in aggregate to the growth-oriented reality, but large caps may experience a drag on earnings due to the stronger dollar. Beneficiaries of a stronger dollar include exporters in international markets such as core eurozone and Japan.
On the flip side, Colton said emerging market assets will most likely suffer due to anticipated higher U.S. rates, and potentially higher cost of servicing US dollar denominated debt.
Colton said investors need to be aware of the impact of "surprise" inflation on asset classes over the short term and the long term.
"We developed a measure called 'inflation beta' which measures the anticipated responsiveness of asset classes to increases in inflation over the short term," said Colton. "For example, equities generally are a good inflation hedge over the long term, but over the short term can be hurt as inflation expectations adjust."
The switch to focus on inflation and growth after the U.S. presidential election versus the low-growth, low-rate environment that was assumed before the election, demonstrates the importance of benchmark agnostic, go-anywhere investing in today's macroeconomic environment, according to Colton.
"Focus on selecting the assets that you want to hold in your portfolio, rather than inheriting some allocations from the benchmark," said Colton.