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The big market movers of 2017

A new year often brings with it the promise of fresh beginnings; however, 2017 might well be inheriting some of 2016’s baggage. Here are some of the key themes to look out for in the coming months. 

Politics, politics and more politics

Regrettably, for investors tired of wrestling political risks, the battle will continue. Matteo Renzi’s December defeat in the Italian referendum has been seen by many as yet another populist political shift and further evidence that populism is gaining ground. Prime examples of populist victories in 2016 included the Brexit vote and the election of Donald Trump as the next US president. 

The numerous uncertainties associated with Trump’s policy objectives remain, with markets looking to 2017 for better clarity. At the moment, markets are in a honeymoon period with Trump and optimistic that his pro-growth policies will materialise to boost growth. 

However, investors should be prepared for delays and periodic setbacks even if the general thrust of his policy remains pro-growth. Even in a Republican-controlled Congress, Trump may experience pushback on several issues. His trade and immigration agenda could further impede his overall pro-growth objectives. This is likely to negatively impact US multinational corporations and export-orientated economies. Only time will tell whether Trump’s harsh campaign rhetoric was merely hot air or whether it will in fact become a political hot potato. 

The European political calendar is jam-packed for the next 12 months, with crucial votes taking place in the largest euro economies – Germany and France – and the triggering of Brexit looming in the first quarter. 

On the local front, political tensions remain high. Although credit rating agencies affirmed South Africa’s investment grade status, the outlook is negative. Political risks have threatened the standards of governance and policymaking with these risks most probably remaining elevated until the ANC’s elective conference in December. 

The increased political risk is likely to compromise the country’s macroeconomic performance and a continuation of political instability – among other factors – may result in a downgrade in future. 

Global growth on the up?

The current standing of China, the eurozone and the US (the triad of regions key to propping up the global economy) is indicative that global growth is set to improve in 2017. There is renewed optimism about US growth due to Trump’s proposed fiscal push. This should translate into moderate but higher consumer and investment spending. It is important to highlight that there were positive prospects for the US economy prior to the Trump victory and fiscal stimulus may only reinforce existing signs of improved future growth.

Despite lingering political concerns, the euro area is strengthening. Job growth is healthy, exports are showing signs of recovery and the region’s economy should continue to improve in 2017 (should there be no political shocks). However, it is unlikely that growth will accelerate in a meaningful manner. 

China’s economy has also gathered steam over the past several months as a result of the typical mini up-cycle in the housing market. Traditional industries are also rebounding from earlier weakness.

A word of caution – the Chinese housing sector is already overheating and authorities are likely to introduce more measures to cool things down in the coming months. 

Shift to fiscal from monetary policy

Major central banks have become acutely aware of the limitations of monetary policy as it gave rise to negative interest rates. This not only introduced unintended adverse consequences but left central banks in a position where they would have little room to manoeuvre in the event of future economic crises. Against this backdrop, the global policy balance will have to shift from complete reliance on monetary stimulus and become in favour of greater fiscal support in order to boost growth. 

In SA, there has been a growing view that the South African Reserve Bank (SARB) should cut interest rates in order to support the fragile domestic economy. However, the use of monetary policy alone may prove inefficient. The improved economic growth expectation for 2017 is dependent on the implementation of reforms, which only government, and not the SARB, can implement. 

Does the current commodity mini-rally have legs?

The new-found commodity bulls may be disappointed when the Chinese housing market slows down this year and if US fiscal stimulus proves to be modest. Although the recovery in the US and the global business sector is expected to improve and growth may surge to much higher levels, one needs to be cognisant of the ongoing political risks and potential protectionist threats. 

In addition, China’s economy will remain a significant driver of industrial commodity demand for several years. If Chinese housing activity slows around mid-2017, this may overwhelm any positive impact in the commodity pits from increased US infrastructure spending. Therefore one should still remain cautious on the outlook for industrial commodity prices given the comparative supply and demand backdrops. 

Tumisho Grateris an economic strategist at Novare Actuaries and Consultants. 

This article originally appeared in the 19 January edition of finweek. Buy and download the magazine here.

 

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