Capital Markets Update: Outlook for 2017

It will be an eventful year ahead, suggests Oliver Wallin, Investment Director at Octopus Investments. Trump’s rhetoric and reality will converge. But, coupled with prospects for global growth and actions central banks may take, his presidency could be one of the potential positives in 2017.

In a nutshell

Investors await Donald Trump’s inauguration on 20 January 2017 to see how closely his actions as US president will match his rhetoric in the election race. The US Federal Reserve (Fed) will need to keep a close eye on the possible inflationary impact of his intention to put America first. Elsewhere, the start of the Brexit process is only one of the political uncertainties Europe faces. It promises to be an uncertain 12 months for capital markets.

Will the Trump card play well for investors?

The dominant theme for the early part of the year will be Donald Trump’s first 100 days as US president. There is quite a bit Trump can do that won’t require approval from the US Congress, although the budget isn’t one of them. That is due to be submitted by the end of February and will take the best part of 2017 to push through Congress before being implemented in October. The US budget will reveal a lot about Trump’s plans on infrastructure spending, tax and balancing the budget, as well as how much support he actually has in the Senate and House of Representatives.

For policy decisions that require only the president’s signature, the first 100 days will set out the Trump stall. Trump is a pragmatist, so the direction he takes may change quickly. Investors are generally hopeful about 2017, and there is a case to be positive for US equities in particular, even if a large part of this optimism has already been priced-in by markets. Bonds look vulnerable to spikes in yield, which would cause prices to fall. The upward direction of interest rates in the US is not good for bonds generally, although any falter from Trump could reverse their fortunes.

Fed likely to act if inflation increases

Trump’s first year is expected to be expansionary and inflationary. His plans for tax breaks, regulation and infrastructure spend will produce the type of fiscal stimulus package the Fed has been waiting for and it should support US equity markets. However, the Fed will have to wrestle with the inflationary impact arising from this stimulus to ensure the US economy doesn’t overheat. This would suggest a faster and steeper interest rate rise trajectory than currently anticipated.

US businesses look to tax breaks and protectionism

A more generous tax regime for companies should create a more favourable corporate environment, which could feed through to company profits. Even the more negative aspects of Trump’s campaign, namely his protectionist bent, could prove beneficial to US companies given the US is already pretty much a closed economy. So, high single-digit or low double-digit growth in the S&P 500 Index is not out of the question for 2017. But an errant Tweet or misplaced comment from Trump could have a serious impact on market sentiment. It’s going to be a nervous ride. A strong US economy, even one with an isolationist stance, should create a positive ‘halo effect’ elsewhere, although emerging markets (other than a selected few, such as Brazil) are unlikely to be the beneficiaries.

Brexit not Europe’s only political headache

Other developed countries have their own issues and risks to deal with. The recent boon to the FTSE 100 has more to do with the weakened sterling than a new dawn for the UK economy. Brexit will dominate market sentiment in 2017, as prime minister Theresa May begins the two-year countdown in March 2017 to officially leaving the European Union. Investors will need more detail of the exit plan before they can make informed decisions.

Meanwhile, 2017 will see elections in France and Germany, and possibly Italy. The political landscape in Europe could change dramatically. With that backdrop in mind, both the central banks of Europe and the UK are likely to maintain their support for economic growth by keeping interest rates lower for longer. Elsewhere, we continue to believe China will manage its economic slowdown as it has done to date. So whilst Donald Trump’s election poses a risk concern for investors, along with political uncertainty in Europe, there are reasons to be cautiously optimistic in 2017.

Oliver Wallin, Octopus Investments

e: owallin@octopusinvestments.com

t: +44 (0)20 7776 3153

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: January 2017.