Johannesburg – Improving conditions in global markets is expected for 2017. Experts are taking a balanced view for the year ahead, given that there may be a range of outcomes stemming from the US and European political landscape.
As a result, there are 10 things for investors to consider for the year ahead, explains Marianna Georgakopoulou, head of asset allocation at Ashburton Investments.
Higher inflation is expected across developed markets. This is due to the uptick in growth. Further growth in infrastructure spend in the US is expected as part of Trump policy. “We are also seeing higher commodity prices and Producer Price Indexes come through,” said Georgakopoulou. In emerging markets, the US dollar strength will likely increase inflationary pressures.
De-globalisation and protectionism
Since 2014, there’s been a trend of de-globalisation, given the protectionist measures being taken, explained Georgakopoulou. “It is set to accelerate with Trump and Brexit,” she said. This will impact currency volatility, growth and exports due to reduced trade. “Domestic cost pressures could also push cost inflation higher and hurt corporate margins.”
The established world order is being challenged, increasing global instability. “An inward-looking US furthers increases this uncertainty,” said Georgakopoulou. Defence spending is likely to rise.
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Pro-business Trump policies
Trump is likely to have a highly business-friendly administration, with most major appointments coming from the private sector, said Georgakopoulou. There are also calls for deregulation in the financial and energy sectors. A cut in corporate taxes between 15% to 20% would result in a capital flows back to the US. This will be positive for economic growth and productivity.
US growth expectations risk
Trump’s fiscal, tax and deregulation agenda could have implications. Higher interest rates impacts US growth, given the long-dated and fixed nature of mortgage system, explained Georgakopoulou. “A strong dollar is a drag for exports,” she said. “The length of economic cycle is already old by historical standards,” she added.
Emerging Market differentiation and value
Value has opened up in emerging markets following Trump’s win. “The market is ‘cherry picking’ parts of Trump agenda,” she explained.
Emerging markets risk premia have been rising due to fears of protectionism. Developing economies, especially commodity exporters, would benefit from higher growth in the developed world. Further, emerging markets are less vulnerable and their valuations are more attractive. “Countries with high real rates should outperform,” she said.
Euro break-up risk repricing
The political risk in Europe is elevated, given the upcoming elections. The populist vote is getting stronger, the Brexit outcome will be an indicator of the European leadership’s commitment, said Georgakopoulou.
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Limits to monetary policy
There are “quantitative limits” to the current quantitative easing programmes, explained Georgakopoulou. Both central bank and investors have shifted away their reliance on “excessive easing”. This will result in increased volatility and the likelihood active portfolios will outperform passive portfolios, she said.
China secular slowdown
There is still heavy dependence on fixed asset investment. Consumption cannot make up for this decline, said Georgakopoulou. “We are seeing credit expand rapidly again, while there is pressure on exporters from FX [foreign exchange].” China might “shave off” unproductive debt to avoid low growth.
Continued support for commodities
Demand for commodities have been strong, driven by China over the past three quarters, said Georgakopoulou. A contraction in supply and possible consolidation may be a key driver. Read Fin24's top stories trending on Twitter: