We had been expecting global GDP growth to increase to around 3.5% in 2017, from 3.0% this year. This was driven by a US economy that has continued its consumer-driven expansion and by Europe’s walking-pace recovery (with a weaker UK, riven by Brexit uncertainty). Meanwhile, emerging markets continue to accelerate, fuelled by more stimulus measures in China and ongoing recoveries from recessions in Brazil and Russia.
How will Trump change this? Fiscal stimulus is likely in the form of big tax cuts and major infrastructure spending. Also expect deregulation with an unfortunate anti-environmental twist. How fast and how far reaching is unclear, but both look positive for growth in 2017.
On the other hand, Trump’s promises of protectionism, his isolationist tendencies and lack of political experience threaten to bring instability and weaker growth. We can hope that free-trade Republicans and experienced foreign-policy advisers may make him a steadier president than candidate, but there is no denying the downside risks.
Inflation is likely to re-emerge next year, particularly in the US and UK. This is partly the result of higher commodity prices and, in the US, wage inflation that is further boosted by stimulus measures from Trump. Given the global deflationary pressures we have been struggling with, it’s hard to be unhappy about this. However, we think these deflationary pressures will not be easily vanquished, so inflation should remain contained for now.
Rising inflation means US interest rates will probably increase at a slightly faster pace. But as with inflation, low rates are to a large extent structural, so the emphasis is on ‘slightly’. Indeed, in Europe and Japan we expect interest rates to remain pinned firmly to the ground for now.
Equities get a second wind
With global growth picking up speed, 2017 looks equity friendly. We had been negative about US equities, preferring cheaper markets such as Europe, Japan and emerging economies. But Trump’s tax cuts, deregulation and stimulus should help the revival in US corporate earnings, making us more positive – though we worry that sooner or later tighter monetary policy will put the brakes on.
The fair winds that lifted emerging markets should continue to blow. Rising commodity prices, better news in China, and stronger growth have renewed investor enthusiasm.
The fair winds that lifted emerging markets should continue to blow. Rising commodity prices, better news in China, and stronger growth have renewed investor enthusiasm. When investor flows return to these markets the tide tends to come in for a good while. Higher US interest rates, a stronger dollar and Trump-protectionism are risks, but we suspect these issues will matter more after 2017.
Naysayers also point to China’s unsustainable credit bubble. We are not overly concerned about this in the short term. Yes, China needs to re-balance its economy and restrain its double-digit credit growth. And yes, when this adjustment starts it may be uncomfortable, but the need for stability before China’s politically important 19th Party Congress in October suggests a stay of execution is likely.
Emerging economies are also much more than China. Careful investors can benefit from the emerging world’s faster growth while avoiding overexposure to China or US risks.
Political uncertainty in Europe
European equities should do better next year, backed by a cheap currency, aggressive stimulus, attractive valuations and ample room for growth. That said, elections in France, the Netherlands and Germany could add to the roll call of populist victories. While this brings uncertainty in the short-term, it will not necessarily be bad for European assets. More pressure for reform of European institutions may even be helpful.
Bonds lose their lustre
With government bond yields at ultra-low levels and inflation rising in the US, it is hard to be enthusiastic about developed-market government bonds. Corporate bonds are only a little more attractive, now that this year’s rally has sucked the juice out of the risk premium.
We continue to favour emerging market government bonds. Low government debt levels and a high proportion of local currency bond issuance mean risks are lower than in the bad old days. Investors are rewarded with relatively high yields with less direct exposure to rising US interest rates; though we are keeping a weather eye on dollar and China-related risks here too.
Opportunities among alternatives
Less well-travelled asset classes like listed infrastructure, senior secured loans and asset backed securities are also attractive in this environment. They provide some of the diversification benefits offered by government bonds, but with more appealing returns and some inflation protection. These opportunities can be hard to access directly, but specialised diversified growth funds offer an easily accessible route.
In short, 2017 offers a slightly hotter dish than 2016, albeit with an extra twist of political uncertainty.
But it still tastes rather lukewarm. We seem stuck in a loop. Anaemic and uncertain growth is holding back business investment, which contributes to weaker demand and low productivity growth, begetting yet more anaemic growth. The solution the IMF has recommended is large-scale infrastructure-focused fiscal stimulus. Until 8 November the US Republican party was opponent-in-chief to this Keynesian medicine. Ironically, under President Trump, they now look likely to be the ones to press the plunger on the syringe.
This article was originally published on www.investmentweek.co.uk/ on 22 November 2016