Uncertainty for investors has not ended with the start of the new year as all eyes turn to US President-elect Donald Trump and whether he will introduce fiscal reforms.
The year is likely to see a change in macro dynamics both for growth and inflation, particularly in the US.
Shifts in the geopolitical landscape caused by Trump’s new administration and a series of elections in Europe could create “volatility spikes”, says Architas chief investment officer Jaime Arguello.
He says: “Trump’s reflation plan is aimed to boost growth but there is a risk that markets have priced in too rosy a scenario for the concrete approval and implementation of the fiscal stimulus plan.
“While his protectionist policies could have an impact on global growth it could also open up a power vacuum that China might wish to fill.”
The triggering of Article 50 to kick-start negotiations on the UK’s exit from the European Union as well as the various elections in Europe, especially in France, will be among the most interesting events for investors this year, adds AJ Bell investment director Russ Mould.
He says: “The terms of the ‘soft’ or ‘hard’ Brexit will be instrumental in shaping sentiment toward the UK equity market in 2017. A ‘hard’ Brexit could well snuff out the autumn rally in sterling, especially as Britain still runs a combined annual budget and trade deficit that would shame a banana republic.
“That in turn could boost the overseas earners in the key indices, although this trade is now well know and ironically the real value may be appearing in the downtrodden domestic names, such as real estate plays and consumer discretionary stocks.”
Monetary policy rears its head
Mould says the market is now “relaxed” because it has priced in growth for this year but he argues central banks could still step in with more monetary policy actions.
Tilney Bestinvest managing director Jason Hollands says it is possible that the Bank of England might increase rates, reversing the path for sterling.
At the same time this year, pressure on costs for investors will continue as EY financial services director Jason Whyte notes, saying there will be a “massive and painful change” for the asset managers especially following increased scrutiny from the FCA.
Speaking at a recent event for Fund Strategy sister publication Money Marketing, Whyte said: “The FCA asset management market study sent a very clear message which is more focus on value for customers, but it will be a lot more active in pursuing areas in the market where the market has failed.
“Sooner or later there will be ways to take an awful lot of the frictional cost out of transacting and it’d be a massive and painful change for the industry but the end result will be a much more efficient and potentially a more innovative market culture.”
JP Morgan Asset Management chief market strategist for the UK and Europe Stephanie Flanders
Medium-term risks to the global economy and financial markets seem both higher and more various than they were a year ago.
As we enter 2017, the immediate risk of the US slipping into recession seems a good deal lower than it was. In fact, the upside risks to global growth and inflation in the short term are probably higher than they have been for several years, and there is a good chance that forecasters will be revising up their 2017 forecasts for once, not revising them down.
However, we will be keeping a few things in mind. Firstly, US reflation does more good for the global economy than harm, contributing to faster global growth and the end of deflation fears, without causing major financial disruption in global markets due to sharp repricing of US rate expectations and/or a dramatic further rise in the dollar.
And while the UK is expected to slow down markedly in 2017, it is not likely to fall into recession. We assume the economic impact of Brexit will be negative, but not enough to trigger a downturn. However, we should be alert to the consumer impact of higher inflation in an environment in which many businesses have put investment plans on hold.