As in previous years, AsianInvestor asked various market experts which types of investment are set to prosper in the coming 12 months. 

It proved very difficult to come down decisively on one answer, presumably reflecting the particularly high level of uncertainty in the markets stemming from the uncharted waters of a Donald Trump presidency and the possibility of the breakup of the European Union. 

What will be the best performing mainstream and alternative asset classes, on a risk-adjusted basis?
Answer: High-yield bonds, event-driven hedge funds, Asia-Pacific real estate

The regions with the greatest potential for improvement in 2017 are the US and emerging markets, although it’s hard to predict how the trade dynamic between the two will play out under the Donald Trump administration.

The key drivers will be less monetary accommodation, more fiscal push and more policy ruptures to support an inflection in rates and inflation. More typical asset relationships and rising volatility might be in store, especially in the US.

A short-dated approach to high yield could benefit from the tailwinds of US rate rises and benefit from any associated volatility. High yield usually does well in rising rate environments.

Investor preference for the corporate sectors (investment-grade, high yield, bank loans) reflects a longer-term caution that the credit cycle is in its late stages, with maturity and rollover risk increasing in 2018 to 2019.

Equity prospects in Asia are mixed. Indonesia and India look expensive, while Korea and Taiwan are more appealing. China offers the potential for unwelcome macro surprises, given its bad debts linked to state-owned enterprises and an inefficient allocation of capital, as well as the uncertainty over Trump’s policies.

Hedge funds should selectively have a good year. Event-driven and merger strategies could benefit from more pharmaceutical and technology M&A if the new US administration conducts corporate tax reform, as expected. US long/short equity funds may benefit from improving alpha conditions, and relative-value credit strategies could thrive as the rate environment shifts.

In real estate, Asia-Pacific property markets may outperform expensive US options, with Australia and China’s tier-one cities offering good risk-adjusted returns.

The dollar offers a clear contrarian opportunity in 2017. The US budget deficit is deteriorating and more structural spending is planned, even as Trump looks to cut taxes. That could increase the structural deficit and necessitate more debt issuance, damaging the long-term fundamentals of the dollar.

Other Year of the Rooster predictions:

Will more countries vote to leave the European Union?

Will the Bank of Japan be forced to rethink its 10-year bond yield target?

How many rate hikes will the US make this year?

Will Donald Trump spark a trade war with China?