2017 Global Investment Outlook

Jay Pelosky, Founder, Pelosky Global Strategies

www.pelosky.comFree Wealth Investor Conference

Hangzhou, ChinaDecember 10, 2016

Global Risk Nexus: Economics, Politics, Policy and Markets

Great Financial Crisis (GFC)/ Economic Recession (2007-2009) ↓

Over-reliance in Central Banks (Policy Mistake) ↓

Political Upheaval (Brexit, US Election) ↓

Market Repricing (Global Bond Sell Off)

ECONOMICS

Global Growth DecelerationPotential Growth Rates

Faster Growth Brings Inflation Risk

1990s 2016

US 3.3% 1.75%

DM 2.25% 1.16%

EM 7% 5%

Key Growth Inhibitors

Poor Demographics In Both Developed & Emerging Economies - Getting Old Fast

Declining Labor Productivity - US in Biggest Slump Since the 1970s. World Productivity has Collapsed from 1.8% to 0.5% pa.

50% + of Global GDP Yet No Global Locomotive

Emerging Economies

Terms of Trade down 20%, Strong $, Protectionism Risks

Domestic Demand Growth Capped by Income/Debt Levels

Getting Old Before Getting Rich

Key Economic Takeaways

Low Growth World is Here to Stay Over Foreseeable Future (3-5 yrs.)

Declines in Potential Growth Rates are GLOBAL

US Economic Nationalism Means No Free Ride

Drivers are Powerful, Long Term Factors that are Unlikely to Reverse Quickly

POLITICS

US, Europe (Germany, France, Netherlands) +China/India/Iran= over 50% Global GDP

2016-17 Global Electoral Cycle

As Political Risk Rises, Investor Risk Appetite Declines

Key to Avoid 1930’s Style Rollback

What Replaces Globalization?Finance, Tip of Globalization Spear, Broken Post GFC

Donald Trump: Negotiator, America First

Asia, Europe & the Americas Each Benefits from Three New & Mutually Reinforcing Growth Factors that Provide the Ability to:

Tri Polar World Global Growth Model

Through the Rise of Urbanization, the Service Sector Economy and E-commerce

SELF FINANCE

SELF PRODUCE

SELF CONSUME

Through Growing Wealth Pools

Through the Rise of Advanced Manufacturing, Mass Customization, 3 D Printing

POLICY

Monetary Policy Alone Leads to Limited Economic Growth

From QE to ZIRP to NIRP to Nowhere

Risk Loss of Faith In CBs and Major Stock Market Decline

Will Monetary Policy be able to Alleviate Recession (FFR at Start of Past Recessions over 5%, not 0.5%)?

From Opportunities for Capital to Opportunities for Labor

Austerity EconomicsPolicy Stagnation → Growth Stagnation → Stagnant Financial

Returns

Shift From Austerity Economics to Investment Economics

Will Transition Blow Rates Up & Send Stocks Down?

Tricky TransitionFrom Pure Monetary to Joint Fiscal & Monetary

in the US, UK, Europe, Japan.

Trump Election/ Republican Sweep Accelerates Policy ShiftEnd of Deflation, Beginning of Inflation?

Short Policy Window to Boost Middle Class Jobs

Lurking in the WingsAI and the End of Working Man

Automation Could Eliminate 50% of Jobs in Next 15 Years

MARKETS

US Public Pension Fund Target Return = 7.5%

The Low Return World

Last 20 Years = 7.2%Last 10 Years = 5.8%Last 1 Year = 0.3%

US Public Pension Fund Actual Returns

What Happens to Returns when the Next Recession or Bear Market Hits One or Both Asset Classes?

The Low Return World

US Economy in 7th Year of Economic Expansion

US Stocks and Bonds Close to All Time Highs in Price & Valuation

OUTLOOK

Developed Economies should have slightly faster growth, higher inflation and higher interest rates. Expect a strong USD, especially against the Yen. Japan could enter an inflation state.

Risk: The Hot House Effect: Big US fiscal stimulus/tax cut+ Protectionism=inflation spike, rapid increase in interest rates, a slowdown in the economy and a sell off in stocks.

Economics

US Republican Party control of the the White House, Senate and House=opportunity for action; however, campaigning is easier than governing. Expect an “America First” mentality.

Risk: The Trump Administration gets off to a slow start, infighting means important first 100 days are a disappointment.

Politics

Donald Trump: Negotiator, Borrower, Builder, Tweeter.Expect him to: renegotiate trade deals, cut taxes, borrow & build.

Federal Reserve Bank: Will raise rates this month and then move very slowly; pleased to see active fiscal policy.

Risk: Narrow policy path between too much stimulus & an overheating economy vs. a slow start for Trump Administration & economic slowdown.

Policy

Remain in a Low Return World

Positives: Developed Economies’ Growth is rising, corporate earnings are recovering, fiscal stimulus/tax cuts are coming.

Risks: Equity Valuations are expensive, interest rates are rising, and the USD is strong.

Markets

Prefer Equities to Fixed Income

Prefer Developed Markets to Emerging Markets

Prefer USD based Investments to Non USD

Markets

US Small/Mid Cap StocksUS/European Financial StocksUS High Yield Corporate Debt

Japanese Stocks (hedged back into USD)Mexican Stocks

Top 5 Investment Ideas For 2017

Financial Markets have repriced & the easy money has already been made. Several of these ideas are best bought on pullbacks.

Political risk, delays in fiscal reform & infrastructure development are likely to provide buying opportunities.

Risks