A Sober Second Half for Institutional Investors

State Street’s Lori Heinel talks with CIO about a tempered global market outlook while health care debate stalls progress on tax code overhaul.

A lot can happen in half a year to change the global market outlook for institutional investors. In the case of the first half of 2017, it’s what hasn’t happened that’s changing the market outlook.

Early optimism stirred by expectations that President Trump would move quickly on deregulation, overhauling of the tax code, and massive infrastructure spending has given way to a tempered market outlook as the administration’s focus has instead focused on health care reform, said Lori Heinel, deputy global CIO for State Street Global Advisors, said in an interview with CIO magazine.  

“What we were hoping for seven or eight months ago is not going to happen,” Heinel said. “We still think there’s a reasonable chance there will be some fiscal stimulus over the next 12 to 18 months, and modest tax reform, but we’ve tempered our expectations from last year in part because we’ve seen the gridlock in Washington continue.”

Republican legislators in Congress had hoped to send a bill that repeals and replaces the Affordable Care Act (ACA) for President Trump to sign back in January, and were expecting to be knee deep in overhauling the tax code by springtime. But as of mid-July, neither health care reform or an overhaul of the tax code has materialized.

This has had a significant impact on investors’ expectations for the remainder of the year, and has created doubt as to whether the Trump administration will be able to deliver on the president’s business-friendly promises. Expectations are in something of a holding pattern until the health care issue is out of the way.

Heinel says that “what kind of health care bill does or does not get through has huge implications on the industry, but it’s unlikely it would have any meaningful impact on the broad market.”

She says what matters most to global investors is that Congress just moves beyond it. “Once we get through the health care debate, it will open the path to stimulus.”

Heinel still has a positive outlook on the economy. “The economy continues to be improving gradually,” she said, adding that “we still think corporate profits will remain strong, even though we’re probably coming off the peak of earnings growth, and even though interest rates ticked up a little bit, they are still very low.”

Meanwhile, inflation “is not a problem at all,” said Heinel, citing how companies like Amazon have used technology to create efficiencies that keep the cost of goods low. “We’re convinced that longer-term rates will stay low. Inflation is not something we need to worry about.”

Heinel also discussed current investing trends among CIOs.

“We are seeing less enthusiasm for macro strategies and more exotic strategies, and a move back to basics,” said Heinel. She says CIOs are also showing more of an appetite for illiquid assets, such as real estate. “Done properly, they don’t have to be more risky than public markets, she said.

Heinel said there are a lot of good opportunities in class A properties, such as office buildings and apartments. However, she added, there’s an “enormous amount of challenge” in retail mall properties, which have been hit hard by the public’s increasing use of online retailers.

Despite several positive aspects of the economy that have institutional investors like Heinel cautiously optimistic, a lot still rides on how long it will take to get past the healthcare debate.

“The longer the health care thing drags out, the more likely they can’t do anything else,” says Heinel. “That’s the danger.”

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