Before
I started to write this, I listed some of the things that could derail
investment markets in 2017. The list was a long one. Interestingly, the various
risks are interconnected and broadly fall under political, economic or
financial concerns. Economic events will drive politics in 2017 and vice versa.
Political
Risks
A
Brexit vote, Trump election and the Italians rejecting the constitutional
reforms proposed by the Prime Minister are unprecedented events that have left
commentators struggling to interpret the ‘events’ of 2016. Voters, it seems,
have decided old school politics for the elite need replacing and have voiced
this belief to devastating effect at the ballot box.
No
one can say whether the anti-establishment backlash has peaked or has further
to run. The General Elections to be held in Germany and France in 2017 will
provide further evidence.
One
thing is for sure, the reality of both Brexit and Trump will unravel in Quarter
1 of 2017 and the direction of travel will become clearer.
Financial
Risks
Stock
markets tend to make the news but the bond markets are arguably of more
interest currently. Bond prices and yields set the benchmark for global
borrowing costs and asset prices more generally. So the timing of any interest
rate rises in America is important for investors around the world. They will
make cash more attractive relative to bonds and shares, putting pressure on
prices.
The
UK faces a special challenge though – looming inflation in response to Brexit.
This will not be good for bonds as their yield is likely to be well below the
rate of inflation (thus offering a negative return).
The
key driver of stock markets, along with returns on competing assets such as
bonds, is corporate profitability. Company earnings have been becalmed in the
UK and US, while share prices are at, or near, record highs. So at some stage,
investors may take fright.
If
2016 saw unprecedented political events, the theme of 2017 is how these will
unravel.
2017
will be a very interesting journey full of twists and turns that’s for sure.
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