Brian Tora considers some of the most significant events around the globe that are likely to impact in 2017, and warns of an exciting but challenging year ahead for those tasked with portfolio construction.
Nobody can accuse 2016 of being a dull year for investors – or advisers for that matter. The important thing now, though, is what does 2017 have in store? At the very least it promises to be interesting with so many changes likely to take place. Aside from the difference that new US President Donald Trump in the White House might make over time, there will be general elections in France, Germany and the Netherlands. All this, plus geopolitical concerns and continued worries over global economic growth could add up to an exciting year.
A volatile environment
For investors and advisers alike, this is likely to mean a volatile environment and a need to be nimble in both strategic and tactical planning. While we can never be certain how things will pan out, there are a few straws in the wind that could give a steer. One came last month, when the Fed raised interest rates by 25 bps. While this was largely expected, the hawkish rhetoric that accompanied the announcement did catch many by surprise. The suggestion that this year could see three further rate rises (most commentators were expecting two at the most) indicates a robust economic scene stateside.
And, of course, we have the start of the Trump Presidency which is promising to restore blue collar jobs in the US. Retrieving those jobs which have been lost overseas to lower labour cost countries is likely to prove beyond his gift, so the wise money is on more infrastructure spending – much needed in the US – funded through more borrowing. Interestingly, this approach looks likely to be adopted in the UK as we strive to replace our reliance on the European Union ahead of Brexit. Donald Trump’s apparent appreciation of Nigel Farage is beginning to look more understandable.
A return to fiscal stimulus
Well, what all this suggests is that fiscal stimulus is likely to replace the monetary option as 2017 travels on. Moreover, the trend towards higher inflation, which most Western governments probably welcome, is likely to accelerate this move. And if monetary tightening continues, then arguably we can return to a more normal investment scene where bonds and cash actually deliver real returns to investors.
None of this is necessarily negative, but it does ignore some of the obvious pitfalls that might derail investment sentiment. First amongst these must be the political environment which is looking as uncertain as at any time in my recent experience. The UK referendum and the election of Donald Trump were clear indicators that a substantial body of opinion exists that no longer trust the political establishment. The growing divide between the seriously well off and the average working man or woman may account for this in part, but the apparent detachment from political leaders to the electorate is as important.
What about Europe?
The Italian referendum at the end of 2016 continued this theme of disenchantment – and Italy is no small problem. As many as eight banks look vulnerable and, while Unicredit’s rescue plans were treated positively by investors, bank failures would seriously damage the single currency zone and an exit from the euro by Italy could prove terminal for this massive financial experiment.
So the results of the three important elections in Europe need to be watched closely. First will be the German Presidential election, due next month. While at the time of writing “Mutti” Merkel is expected to win, the size of the protest vote could affect government policy in the future. In France, where the Presidential elections take place in May, the worry is the return of the right wing Marine Le Pen – still an outsider in the polls, but then so was Donald Trump. Both countries have other important elections taking place, while the Netherlands fits in its decision on who governs neatly between the two.
The future’s bright?
With the US and UK markets hitting all-time highs over the past month or so, investors seem to be taking the view that a positive outcome from recent unexpected events is more likely than an upset. Given the pressures facing both Trump and May, I have sympathy with this view. Do not forget, though, that there are terrorists lurking in the undergrowth that could undermine the best intentions of national leaders seeking to ensure steady economic growth.
For the US a spat with China could upset calculations, while at home problems in Europe might divert attention from how we structure any deal once we’ve departed. Let’s face it, the chances of any significant progress being made on post EU membership trade and other rights this year look pie in the sky. So we need to look elsewhere for real guidance. 2017 is likely to be a challenging year for those tasked with portfolio construction.
