State Street Global Advisors (SSGA) has published its 2017 Investment Outlook report, suggesting three strategies to help navigate a political and investment environment that underwent seismic shifts during 2016.

According to SSGA, major geopolitical events in 2016 such as Brexit and the election of Donald Trump indicate the investment landscape has changed.

SSGA notes that the past few years will be remembered for slow global growth, low (even negative) interest rates, and aggressive monetary policies that stuck the global economy in low gear peddling uphill. However, according to the asset manager behind the SPDR range of exchange-traded funds, 2016 proved to be a watershed year as major geopolitical events (particularly the UK voting to leave the European Union and the election of the populist, anti-establishment candidate Donald Trump in the US Presidential election) increased uncertainty for the future.

In response to a rapidly changing investment landscape, what SSGA refers to as the “New Abnormal”, the firm proposes three strategies for finding opportunities and protecting wealth.

Seek income at a reasonable risk

Over the last few years uber-accommodative monetary polices have limited income generating potential from traditional sources. SSGA expects returns from bonds to remain low, while risks (such as duration and rating downgrades) to remain high.

The firm suggests dividing the fixed income segment of one’s portfolio into three distinct buckets, aimed at three objectives — diversification, stability, and income, with the core of the portfolio providing all three. Other strategies include favouring floating over fixed, and augmenting credit allocation with senior loans which may outperform fixed rate high yield bonds in an era of rising rates and elevated defaults.

Implementation Ideas:
SPDR DoubleLine Total Return Tactical ETF (TOTL)
SPDR Blackstone / GSO Senior Loan ETF (SRLN)
SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN)

SSGA also recommends looking beyond traditional fixed income allocations to include dividend-paying equities. The focus here should be on dividend growers (quality payers) and not just the highest-yielders in the market.

Implementation Ideas:
SPDR S&P Dividend ETF (SDY)

Position for a reflationary environment

Towards the end of the year, price level expectations have crept up in response to President-elect Trump’s pledge to increase fiscal, primarily on infrastructure. To make portfolios more resilient to this growing risk of inflation, SSGA recommends moving beyond traditional Treasury Inflation Protected Securities (TIPS) and investing in real assets.

The firm suggests that stocks of companies in natural resources industries, such as industrial materials, agricultural and energy firms – direct beneficiaries of Trump’s infrastructure projects – may act as a suitable hedge against inflation.

Implementation Ideas
SPDR S&P Global Natural Resources ETF (GNR)
SPDR SSGA Multi-Asset Real Return ETF (RLY)

Look to mitigate headwinds from episodic volatility

SSGA reports that while the CBOE VIX Index, a common metric for expected near term volatility in the S&P 500 Index, has been well below its long-term average of 19.7 for over five years, a different picture emerges from analysis of the CBOE SKEW Index.

Otherwise known as the Black Swan Index, the CBOE SKEW Index uses out-of-the-money options to calculate the expected probability of a tail risk event. This contrasts with the VIX, which uses a wide range of options, including at-the-money options to estimate implied volatility. The SKEW Index has been elevated recently, even as the VIX has been contained to within normal limits. This indicates the market is pricing in a higher than average probability of a significant fall in US equity markets.

SSGA recommends considering an allocation to safe haven assets such as gold, which has a 0.02 correlation to stocks and a 0.12 correlation to bonds over the last 25 years. If looking to smart beta approaches as a means of navigating potential volatility investors may wish to look beyond single-factor low volatility strategies to consider equity allocations that seek to minimize volatility, as well as contain other factors — like value and quality — for a more balanced and diversified exposure.

Implementation Ideas:
SPDR Gold Shares (GLD)
SPDR MSCI USA StrategicFactors ETF (QUS)
SPDR MSCI EAFE StrategicFactors ETF (QEFA)
SPDR MSCI Emerging Markets StrategicFactors ETF (QEMM)