The second half of 2016 was dominated by a recovery in global growth and an uptick in inflation, a reflationary outcome that was a major turnaround from the deflationary scenarios that dominated earlier in the year. Higher, but still-low, inflation and faster growth provided a sweet spot for equities and a problematic environment for bonds, a trend that was turbocharged after Donald Trump won the US presidential election. The events on financial markets in 2016 leave the Risk-Return Matrix pointing to low returns for asset classes. While bond yields have risen and bond proxies, especially A-REITs, have slumped, our analysis still judges most asset classes to be expensive. In the context of our investment framework where we assess medium-term (three-year) return expectations against risk measured as a composite of the risk of capital loss and the potential size of that loss, many asset classes appear to offer minimal, if any, prospective returns over the next couple of years. (VIEW LINK)
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