Economic and political developments in 2016 set the pace for much of what will be happening in 2017 within the global investment sphere. 2016 was full of a lot of surprises and 2017is not expected to veer off the trend line set in the past year by huge margins. In their 2017 investment outlook, Goldman Sachs Asset Management project that the long post 2008 global financial crisis recovery will continue in this year. Growth is expected to be experienced in many more countries, with the global economy getting its strength from a broader base of economies than any time since 2010.
Global Market Risks
Geopolitical Market Movers in 2016
In the past year we had the Brexit materializing in the European Union and the ensuing drop in the value of the sterling pound. In the US we had the unexpected presidential election victory from Donald Trump and the Republican Party getting a majority in both the House of Representatives and the Senate. In the Far East, the new head of state for the Philippines President Rodrigo Duterte was applying unconventional ways to dealing with drug lords in his country; while at the same time being unapologetically undiplomatic with how he was handling his US/China relationships.
The disputes in the South China Sea were increasing too and the geopolitical tension between Russia and the US was sustained all throughout the year. The war in Syria was also a major news headline that was defining and redefining political alignments between the EU, Russia, China and the US.
On the economic front, the US Federal Reserve raised its interest rate for the first time in December 2016; this being the second time it had raised the rates in a decade. The first time it raised the rates in the past 10 years was in December 2015. Other major economic trends that reverberated globally were the ups and downs in the commodity markets, particularly in the oils and the precious metals.
Expected Market Movers in 2017
There is a general consensus from most economic analysts that some of the major market moving headlines in 2016 will spill over into 2017 and define how markets behave throughout the year. Top on the list of the spill overs is Donald Trump’s presidency and the uncertainty surrounding his proposed policy changes.
Unvestors are still uncertain on how far Trump’s administration will go in terms of changing the Affordable Care Act and how big the negative effect on healthcare stocks and the sector as a whole will be. On the other hand, it is not very clear whether the infrastructure and the energy sectors will have a booming year based on Trump’s campaign promise to invest heavily on infrastructure and his support for fossil fuels compared to his predecessor who was pro-renewable energy. No matter which sector is expected to win or lose under the new administration, markets in the US are expected to remain very volatile at least for the first half of 2017.
The rise in populism within the political spheres globally that led to the Brexit vote and the election of Donald Trump as the 45th president of the United States of America is also seen as a potential risk factor investors should consider in 2017. Heather Kennedy Miner, Global head of Strategic Advisory Solutions, Goldman Sachs Asset Management explains that with two important elections coming up in France and Germany in 2017, the fear of seeing the rising populism sentiments shaping the political agenda in those two key economies would result to market volatility globally. Investors will therefore be keenly following the political trends in the EU as the two countries near their elections.
Interest rates hike by the Federal Reserve has also been booked in as a major economic trend to watch in 2017 for investors. In a December 2016 interview at the Fortune Investor Roundtable, Sebastien Page, Co-head, Asset Allocation Group, T. Rowe Price explained that, “We’ve just been through this environment during which the 10-year Treasury bond yielded less than dividend yields on stocks. This is very unusual by historical standards. Post-election they’ve come back close to parity. But this has led some commentators to say, “Well, it’s an upside down world.” Rates keep coming down. People are buying bonds for capital gains, and they’re buying stocks for income.” He continues to explain that, “Interest-rate risk means that this could revert pretty quickly. So we’re worried in particular about interest-rate risk outside the U.S. given how low rates are to begin with, even at the moment, following the recent slight spike in rates.”
Other factors such as relationships between China and the US and between the US and Russia will also greatly influence the path the markets will take in 2017. The war in Syria is still a geopolitical agenda on the table to be priced into the market prices in 2017 too; as well as the expected growth across the emerging markets.
All the above risk factors having been considered, 2017 is predicted to experience moderate growth amid volatility. In terms of asset allocation, Goldman Sachs Asset Management prefers equities over credit but expect low returns due to elevated valuations, limited upside for corporate earnings and the limits on economic growth potential.