Tuesday, January 17, 2017

The big investment questions for 2017

Markets shrugged off political ructions to thrive in 2016. Will investors be so fortunate again?

Will the Trump rally continue?
Who at the start of last year,
when stock markets globally were
panicking, would have bet that
all three major US indices would
achieve record highs in 2016?
Many fund managers expect
more of the same this year. The
US was selected as the country
likely to deliver “the strongest
gains” in a survey conducted by
the Association of Investment
Managers. US profits “seem
certain to rebound” if
President-elect Donald Trump’s
administration “pushes through
corporate tax cuts”, said The
Economist. But “a lot of good
news is priced in”. Robert J. Shiller
of Yale reckons that the cyclically
adjusted price-earnings ratio is currently 70% above its long-term
average. Meanwhile, the three interest rate rises pencilled in by
the US Fed “will reduce the dollar value of foreign profits for
American multinationals”. There are also fears that Trump’s
promised fiscal boom may be derailed by hawks in Congress.
“Wall Street tends to get ahead of itself at times, and this appears
to be one of those times,” said Jenny Jones of Schroders in the FT.
Markets are at risk of a big “Trump disappointment”.
Is the pound set for a rebound?
Much depends on Brexit negotiations. Talk of a “hard Brexit” –
in which the UK forgoes single-market access – has kept the
pound down after the initial referendum shock: it is still some
20% down on its value a year ago. That may well boost the
number of foreign acquisitions of British companies this year; it
may also have an adverse effect on UK growth if household
incomes are squeezed by higher inflation. An FT poll of 122
economists found that most expect growth to slow sharply from
around 2.1% in 2016 to no more than 1.5% in 2017. Still, some
believe the gloom surrounding the pound is overdone. “Sterling is
at an extreme pricing, it is vulnerable to positive surprises” –
particularly to a softer Brexit, says Steven Saywell at BNP Paribas.
Saxo Bank goes even further, predicting the euro could fall to 73p
on the basis that the EU will be forced by migration pressures in
Europe to cede ground to Britain.
Does the commodities recovery
have legs?
Given the FTSE 100’s heavy exposure
to mining stocks and oil companies,
much rides on this question for UK
investors. “A substantial proportion of
the surge in the FTSE 100 in 2016 was
driven by the outperformance of just
two stocks – the oil giants BP and
Shell,” said Jeremy Warner in The
Sunday Telegraph. The recovery in
mining stocks made the index “largely
immune to worries about the impact
of Brexit on the UK economy”. I’m
bullish about commodities, said John
Stepek in MoneyWeek. After an “epic”
five-year bear market, “it would be
surprising for things to turn bad again
so rapidly”. The consensus among oil
pundits is that the black stuff will stay
above $50 a barrel, owing to Opec’s
deal to cut production.

How will Europe fare?
With France, Holland, Italy and
Germany all holding elections in
2017, the risk of another populist
shock is high. In the “quite
unlikely but absolutely possible”
event that Marine Le Pen wins in
France, “it would probably mean
the end of the eurozone and the
EU”, said the FT. And Angela
Merkel is not assured of keeping
her job either. “Without her, a
financial conflagration – a bank
bailout, say – becomes harder to
manage.” Nonetheless, investors
are taking an optimistic view,
said Philip Aldrick in The Times.
A rebound in manufacturing at
the end of last year suggests that
recovery in the bloc has “gathered
momentum”. Investors have duly shrugged off political anxieties
to push the Euro Stoxx index to its highest level since late 2015.
In another show of confidence, government bond yields in the
eurozone’s troubled peripheral states have also fallen sharply.
The biggest worry of fund managers polled by Bank of America
Merrill Lynch is that of EU disintegration, said The Economist.
But Europe might well be “a dog that doesn’t bark”.
Is the 30-year bull run in bonds finally at an end?
Trump’s election and the US Fed’s decision to raise interest rates
“has been hailed by some as the start of a new era for central
bank policy”, said Citywire – with important knock-on
considerations for the bond market. Since Trump’s election, US
Treasury bond prices have tumbled as investors anticipate faster
rate rises. Yields, which move inversely to prices, have shot up
in both the US and Britain; barring a big shock to the global
economy, BlackRock’s strategists reckon “the only way is up” this
year. Luca Paolini of Pictet Asset Management agrees, seeing the
scenario for bonds and dividend-paying stocks as “pretty grim”.
Yet some reckon government bond prices may surprise on the
upside. Much depends on what politicians do next, said John
Stepek. “Will they really start spending? Or will we see another
deflationary scare before too long?”
How about emerging markets?
After the carnage of early 2016,
emerging market stocks broadly
outperformed expectations. But
Trump’s election and the prospect
of a stronger dollar this year may
bode ill for many territories, said the
FT. With capital flowing out of
China, despite efforts to stem it, and
markets expecting further US rate
rises, the largest investors in
emerging markets are focusing on
“differentiation” and “managing
risk”. Russia remains widely tipped,
thanks to the “discernible warmth
between Donald Trump and
Vladimir Putin”. But the big question
is how a Trump administration
would deal with issues of trade and
protectionism, said Jeremy Warner.
Were the Donald to “go through
with threats to tear up the global
trade system”, there’s potential for
“catastrophic damage”.

Buzzwords for 2017
Compiled by Patrick Hosking in The Times
Convexity. The phenomenon of bond prices being
more sensitive to movements in interest rates when
yields are low or negative. Sounds dull and dweeby;
could be explosive if rates rise faster than expected.
Data lake. Bigger, sexier and deeper than a
mere database.
French. Difficult, awkward, hostile. Brexit
negotiators fear that their opposite numbers in
Brussels will be “very French” – in every sense.
Gener-vacation. Holiday taken by parents and
grown-up children together, paid for by the former.
Low latency. Quick. Used in the world of highfrequency
trading, but spreading. It can’t be long
before pizza delivery is described as low latency.
Midult. New demographic identified by marketeers:
women aged 35-55 with the tastes of 20-year-olds.
OOO. Out of the office. As in: “Yah, I’m triple-O till
3 January.”
Shrinkflation. Cutting product sizes to avoid price
increases (e.g. the “wider valleys” in Toblerone bars).

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