2017: Prepare for More Political Upheaval

The theme of politics driving markets is not one that is going to go away any time soon. Neither Brexit nor Trump have actually happened yet

External Writer 10 January, 2017 | 3:27PM

Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Anthony Willis, for F&C Multi-Manager, takes a look back at 2016 and provides an outlook on what could be in store for investors in the year ahead.

We witnessed a year of dramatic political events, where economic and corporate news was pushed down the headlines by politics and two significant events, the outcomes of which were not priced in to markets – the UK voting to leave the European Union, and Donald Trump winning the US presidential election. Despite these market shocks, equities managed to deliver positive returns, and for Sterling based investors relatively strong returns thanks to the fall in the currency as financial markets digested the prospects for the UK outside of the EU.

The central banks continued to be a key player in financial markets and the European Central Bank, Bank of Japan and the Bank of England all loosened monetary policy over the course of the year. Financial markets were expected to suffer steep falls and volatility in the event of Brexit or a Trump win – in both cases we saw a sharp initial selloff but an equally rapid rebound. Much like the opinion polls called the outcome incorrectly, those predicting the fallout in financial markets were equally humbled.

Elsewhere, the oil price saw a year of volatility but made a significant recovery thanks to OPEC and others finally agreeing cuts to production. This is beginning to feed into inflation expectations, which in turn is causing investors to reassess the attractiveness of fixed income holdings, many of which saw strong returns in 2016 but face a potentially less supportive backdrop in 2017.

Politics to Take Centre Stage in 2017

The theme of politics driving markets is not one that is going to go away any time soon. If nothing else, whilst we have seen the votes taking place, neither Brexit nor Trump have actually happened yet, so to speak, and there is plenty of news flow to come from both.

The UK economy appears set for a more difficult 2017, though without knowing what sort of Brexit the UK government is aiming for, firm predictions are next to impossible. Our 2018 outlook and beyond will also still have plenty to say on Brexit – the Article 50 process is set to take two years, which appears optimistic given the size and scope of negotiations, along with the need for ratification by all EU members.

A significant shift in the political landscape is expected when Donald Trump is inaugurated as President in mid-January. US equities have so far seen only seen positives in their expectations for the Trump regime, focussing on domestic economic stimulus and the possibility of significant corporate tax cuts. On the other side, fixed income markets are wary of the inflationary pressure associated with many of Trumps policies. Whilst policy certainty will eventually come, what may matter more over time is how Trump behaves in the event of a crisis when swift decisions are made either on a domestic or international level.

The European Union also faces a very important year. Against a backdrop of negotiations on Brexit, France, Germany, the Netherlands and now Italy will all see general elections. All of these countries are facing a populist backlash against the establishment, and the European Union has been targeted by many of the populist campaigns as the root cause of all domestic issues – clearly not the case but it makes for a compelling argument.

As we look forward to 2017, and a year which is likely to see further political upheaval, we should take comfort in the support from the central banks along with a relatively benign economic backdrop, which should support company earnings. Whilst we hold some concerns for fixed income given the outlook for growth and inflation, we have a positive view on equities and we do believe that by investing in fund managers with a proven ability to pick stocks, we will be able to smooth out some of the inevitable volatility in markets and deliver positive real returns for our investors.

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