Investors have been warned to “buckle up” next year as political turmoil, rising inflation and tighter financing conditions look set to rub up against improving economic growth and rising corporate earnings.
The ramifications of global events including the possible triggering of Article 50 in the UK, Donald Trump assuming the US presidency, the potential rise of populist political parties across Europe, as well as ongoing concerns over China’s growth, will give investors plenty to think about next year.
According to Pictet Asset Management chief strategist, Luca Paolini, this confluence of events will present a challenging environment for equities, but potentially a pretty grim one for bonds and bond-like dividend-paying stocks.
Paolini said: “The winners in the current climate should include cyclical shares as well as traditional hedges against volatility and inflation, such as gold, the VIX and inflation-linked bonds.
“Within the developed world, we have upgraded our growth forecast for the US economy. Trump’s corporate tax plans, infrastructure spending and encouraging multinationals to repatriate foreign earnings could add up to 1 percentage point to GDP growth in the next two years – although the final policy mix is likely to be watered down.”
According to Paolini, a recession in the next 12-18 months now looks more remote, as long as private investment spending rises at a faster rate than GDP.
Russell Investments has also warned investors to brace themselves for a “challenging investment environment” in 2017.
It predicted near-term, global economic growth was likely to improve, spurred by fiscal stimulus as political leaders worldwide moved away from austerity. Longer-term, however, it believed the prospect of trade protectionism raised by Brexit and the US presidential election could mean slower growth and higher inflation.
Russell Investments senior investment strategist EMEA, Wouter Sturkenboom, said: “Buckle up for what could be a roller-coaster investing ride in 2017. We will watch closely for evidence that markets have moved too far into fear or euphoria and look for downside protection when it is cheap.”
