return expectations, given all the economic policy Our Tactical Tilts and geopolitical uncertainty mentioned earlier. We As equities, high yield and the dollar have rallied believe there are three compelling arguments. over the course of the year, we have continued to First, there is potential for upside reduce the overall risk level of our tactical tilts. At surprises in 2017: the beginning of 2016, we had already reduced our exposures by 50% relative to peak levels in 2015, as ¢ Saudi Arabia and the rest of the oil producers measured by value at risk. By the end of 2016, we had may stick to the announced oil production cuts, reduced exposures further, based on our investment thereby boosting energy sector earnings. discipline of averaging in and out of our tactical tilts. ¢ A Trump administration fiscal stimulus could boost growth by more than we expect. Underweight Fixed Income: We continue to ¢ Corporate tax cuts could increase corporate recommend underweighting US fixed income assets sector profitability. as the Federal Reserve slowly but steadily raises the ¢ A possible tax holiday could encourage US federal funds rate. We expect the 10-year Treasury multinational corporations to repatriate bond yield to range between 2.5% and 3.0%. As some of their earnings and deploy them for a result, we forecast a 1% return across short- and stock buybacks. intermediate-maturity fixed income assets and a near zero return for the 10-year Treasury. Longer We assign a 25% probability of such upside maturities are expected to have negative returns. surprises relative to a 60% probability of our base We also recommend underweighting fixed income case scenario and a 15% downside probability. assets to fund tactical tilts given their higher (Please see Section III, 2017 Financial Markets expected returns. Outlook, for a more detailed discussion.) Second, we recommend staying invested Overweight to High Yield: While we reduced because we believe that the probability of a