2017 – The Big Issues

 

 

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.