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The financial markets in 2017

2017 is set to be an interesting year; with elections in three major European countries (Germany, France, Netherlands), the official inauguration of Donald Trump as US president, and the likely triggering of Article 50 all on the horizon. And you thought 2017 was going to be easier.

Not to forget Italy, which is currently dealing with a transitional government and a delicate banking crisis that has yet to be resolved. But how will these and other events influence the markets and more importantly, your investments?

The Trump era

Trump’s policy seems to mainly focus on three areas:

  1. Infrastructure investments
  2. Recovery of the domestic economy
  3. Tax relief for businesses

Each of these measures could have a positive impact on the American economy. Economists expect a 2.2% increase in GDP in 2017; but with a public debt equal to 104.7% of GDP, it will not be easy to justify further spending. The US could become one of the driving forces of the world economy in 2017, but only with continued low interest rates (which, for the moment, is not expected by markets), and an economy based on free trade, which is a long way from the barriers to trade that Trump spoke of on the campaign trail.

We therefore expect an initial rate hike and a subsequent stabilisation in the face of moderate growth.

Political instability in developed countries

2016 will be remembered for the rising support of populist parties. This has fuelled political uncertainty in many developed nations. As elections loom in Germany, France and the Netherlands, there could be an impact on market volatility. Unemployment and inequality are set to be the social issues on which elections ride this year.

If Europe manages to escape the political deadlock in 2017, there could be great opportunities in the equity space.

Central banks take a step back

Central banks have been able to cushion market declines, but they have exacerbated the “hunt for yield” as investors look for returns in the context of interest rates still at historic lows. In 2017 central banks will likely start to reduce their presence in the market. But the international political arena poses some risks to the global economy, leaving the door open to expansionary monetary policy.

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Asset classes that generate extra yield, such as high yield and emerging market bonds, can still offer an interesting risk/return profile.

China slows down, but still runs fast

The growth expectations for China point to +6.5% for 2017. Whilst this is slower than before it is still a strong growth figure. We don’t expect a significant devaluation of the yuan, which will enable China to transform itself into a consumption economy that can rely more on internal demand, as is seen in other advanced economies.

Emerging markets equity will benefit from this. This asset class is still cheap compared with its developed countries counterpart. The lower the price earnings, the better value it is. Emerging markets stood at 11.6 whilst developed markets equity stood at 16.1

Oil production cut

The decision of the Organisation of Petroleum Exporting Countries (OPEC) to cut the oil production by 1.2 million barrels per day, in accordance with a cut from NON-OPEC countries, will have its effect in the first half of the year. Oil prices will rise, although its unlikely that they’ll return to $70-80 per barrel in the short term, despite the recovery of global growth and of the overall oil demand. US producers are ready to increase the production in view of the first structural increases, thus balancing the increased demand.

With oil at about $50/60 a barrel, we expect a positive impact on equity and high-yield bonds, as well as lower inflation.

Ready for anything: the possible surprises of 2017

Given the year that has just passed, we’re prepared for several surprises in 2017. These two would have the largest impacts on markets.

Growth beyond expectations. If global economic growth exceeds expectations there could be a rally in global stocks, and further pressure would be placed on the government bonds of developed countries. For this to happen, the Brexit process will have to be well-managed and inflation in developed countries will have to increase.

China devalues the yuan beyond expectations. The main challenge the Chinese president faces is the management of the high debt in the Chinese economy, which is increasingly based on consumption. Currency devaluation could be used to help ease this transition. A devaluation of the yuan by 15-20% against the dollar is unlikely, given the West’s commitment to fight deflation. But if that were to happen it could be a difficult year for equity, particularly emerging markets equity.

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