Happy New Year! But Will 2017 Be A Happy Year For Shares?
From the Brexit vote to the US general election, 2016 has experienced a wave of political and economic shocks which have had implications for the financial markets that are likely to continue throughout 2017. Although the outlook for the UK equities market is marginally unstable, the global financial markets as a whole has a generally positive outlook.
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It is likely that the performance of UK equities will continue to be influenced by bond prices and the value of the pound in respect of the US dollar and the Euro as it has been throughout 2016. The rise in the prices of fixed interest securities (which has been unusually accompanied by a rising equity market), along with the fall in value of the pound has been the most significant influence on UK equity prices in 2016.There are four main challenges that the equity market is likely to face in 2017, these are company profits, inflation, politics and bonds.
UK companies have experienced a lack of profit, which, if a devaluation of sterling hadn’t occurred, 2016 would have been a year of no growth. Unfortunately profitability is projected to remain muted in 2017, which is likely to have a negative impact on the UK equity market.
The fall in the value of sterling has caused a reappearance of inflation. This will decrease the buying power of British households, which will therefore dampen investment in UK equities, thus potentially limiting growth in UK equity value.
The uncertainty of the UK’s Brexit plans is likely to hinder the growth in the UK equity market until article 50 is triggered and the government’s intentions are clear. The possibility of political shocks in the negotiation stage of Brexit will encourage cautious investment, further limiting the growth in UK equities.
The final influence that the UK equity markets will face in 2017 is the shift in bond prices. Bond yields hit rock bottom in 2016, however the expectation of a rise in interest rates (or at least a lack of reduction) is likely to cause a decrease in the value of fixed interest securities. This expectation should in turn encourage investors to shift their portfolio weighting in favour of equities before a fall in the bond market occurs, thus increasing the value of equities in the process.
The election of President Donald Trump has spread pessimism around the world for the future of the USA due to the President’s brash character and aggressive foreign policy. However the domestic and fiscal promises made in his campaign could offset the shock of the election result and cause a rise in the US equity market. President-elect Trump’s policies stand for domestic investment, jobs growth, lower taxes and less regulation, all of which could give rise to inflation and economic growth.
It must be stated that the promises made in election campaigns are not all going to be honoured and could face restriction and opposition, however the President’s plan to reduce taxation should be relatively straight forward given the heavily weighted Republican Congress. The intention is to reduce corporation tax from 35% to 15% and to make further income tax cuts. This will both increase the profitability of companies and the disposable income of households leading to greater investment in equities and therefore a rise in equity prices. Additionally, Trump has also promised to increase expenditure in non-residential construction by 30% which would have a positive impact on employment levels and stimulate the economy, giving rise to a growth in the US equity market in the process.
Although the outlook of the US equity market is relatively positive based on the promises and policies made by President Trump it is important to remember that his election was largely unexpected and that his unconventional mannerisms and aggressive foreign policy could give rise to a wave of political shocks and periods of uncertainty that will hinder the growth of the US equities.
Due to the political shock of the Brexit vote, along with major elections due to take place in Holland, Germany and France, the European equity market in 2017 is likely to experience high levels of volatility. As a result of this, cautious investors might shy away from European equities for now, however the outlook for the future of the market is generally positive despite recent political concerns. The Eurozone has already started to experience a modest but respectable growth; a GDP growth rate of 1.5% for 2017 is perfectly feasible. Banks are becoming ever more stable with capital ratios being substantially higher than in previous years and the Banks’ liquidity vastly improving. These positive factors are likely to become apparent to investors within the next year and will encourage investment in European equities, thus stimulating growth in the market and the European economy. Additionally, the political uncertainty of the UK caused by the Brexit vote could direct investors away from UK equities and towards European equities
The outlook for the Asian equities market is generally positive. An expansion in fiscal spending and infrastructure projects is set to continue, resulting in higher employment levels and a growth in GDP which will have a positive impact on Asian Equities. More export-driven markets, (such as Korea and Taiwan), are expected to benefit from a recovery in consumer demand. The potential for stronger demand from the US, coupled with a low base year effect in 2016 should stimulate a growth in Asian equities. Additionally, wages are forecasted to maintain their strong growth rate in 2017, thus increasing consumer demand and resulting in a growth in profits of Asian companies.
The outlook for the fixed interest market is less optimistic. The most significant reason for this is the likelihood of reflation (recovery from zero inflation/deflation) in the coming years. There are three main reasons for this. Firstly, commodity prices have recovered which is likely to have a knock on effect on consumer goods, causing the prices to rise. The second reason is an increase in domestic investment. US President-elect Donald Trump is expected to try to reflate the US economy with large increases in infrastructure and defence spending. Finally, there is a growing possibility that 2017 will see a rise in interest rates, which will be accompanied by a rise in fixed interest yield and therefore fall in value. The fixed interest rates are not currently sufficient enough to compensate for the potential credit and political risks that have come about from the political shocks of 2016, and therefore the value of fixed interest securities are likely to fall accordingly.