2016 was certainly an interesting year for financial markets and investors. After experiencing the worst 5-day start ever with the S&P 500 falling approximately 6%, global markets rebounded to reach all-new highs. Investors took on higher risk as they ditched the safe-havens of government bonds and started investing more into higher-yield bonds and growth assets.
We saw strong growth and interest in a number of key sectors, including higher yield equities, i.e. those companies paying consistent, reliable dividends, as well as Real Estate Investment Trusts. We also saw a strong uplift in energy equities throughout the last quarter of 2016, on the back of the rising oil price.
Finally, of course, we had the US election that saw a surprise victory for the Republicans as well as the first rate rise taking place. Just what does all of this mean for the outlook for 2017 and how should we be positioning our investments. I’ve outlined below the key themes that we see playing out this year.
1. Trump – Pro-Growth
Trump’s key focus on increasing both infrastructure and defence spending as well as tax and regulatory reform are likely to lead to continued growth in the US economy. We have seen the impact already with key sectors such as steel stocks rallying post the election outcome.
2. Further Rate Rises
The Federal Reserve has already indicated that further interest rate rises will be on the cards for 2017, which will likely lead to a stronger US Dollar as rates remain low in other developed nations, including Australia. Emerging markets may suffer as a result of this, particularly with exposure of their debt to the US Dollar, while Australian companies with US-dollar earnings exposure are likely to benefit.
With interest rate rises on the cards, we remain cautious with fixed income positions in the portfolio, and would suggest that investors review their current holdings with their adviser, as rising interest rates will typically lead to falling bond prices.
3. Brexit – Hard Landing
2017 will begin to outline the true impacts of the Brexit vote with companies shedding employees, shifting headquarters and ongoing general uncertainty. This will likely create opportunities for investors throughout the year, particularly with the significant depreciation of the pound.
4. Quantitative Easing for Japan and Europe
It is likely that both the Bank of Japan and European Central Bank will extend the quantitative easing programs that were implemented in 2016. Coupled with the Brexit aftermath, we are likely to see further volatility in European markets, which could also create opportunities for investors in the right sectors.
5. Ongoing Political Uncertainty
Political uncertainty has been a major consideration for investors for 2017, and for European markets, it’s likely to continue. This political uncertainty, highlighted by both the Brexit vote as well as Italy’s ‘no’ vote to constitutional reform, could lead to economic policy changes that will impact financial markets. We remain cautious on European markets.
Cautiously Optimistic – The Stance for 2017
Global economic growth forecasts, combined with a number of other macroeconomic factors, are likely to result in a positive start for 2017. We see rising interest rates having an impact on fixed income prices and remain cautious on the asset class. With volatility and uncertainty comes opportunity for investors. By keeping some ‘powder dry’ and cash on the side-lines, we can ensure we’re in a position to take advantage of such opportunities as they arise.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.