4.5 million pounds! This is the amount a £1 accumulator bet on a Brexit vote, a Trump victory and Leicester City winning the Premier League would have realised. In such an uncertain and volatile environment, we want to assist you in making more informed decisions on the markets and beating the odds! Following our analysis of the major market events in 2016, and our insight on the 2017 outlook for emerging markets last week, we assess today what 2017 might look like for developed markets amidst political and economic uncertainty.
Since June 23 and the EU referendum, the United Kingdom’s economy outlook has been driven by Brexit talks. ”Brexit means Brexit” summarises the uncertainty around the agreement (if any) that will be reached between the European Union and the United Kingdom, and illustrates the threat to investments, competition and productivity Brexit has created. Among the many issues pertaining to leaving the EU, UK businesses are likely to suffer from a fall in exports to the EU27 from 44% to as low as 30% if no free-trade deal is reached. Moreover, UK equities could lurch lower should confidence fade away if the prospect of a ‘Hard Brexit’ loomed nearer.
Despite this, the FTSE100 has been surging since the Brexit vote (and particularly over the last two weeks), which has sometimes been interpreted as a positive sign for the UK economy by Pro-Brexit commenters. However, this is most likely explained by the depreciation of the British pound: in dollar-terms, the FTSE 100 was down 17.4% per cent since June 23. Additionally, 77% of FTSE100 companies’ revenue was earned outside the UK in 2016, which translated into higher revenue in pound-terms, the reporting currency.
The fall of the British pound has made it the worst performing Group-of-10 (G10) currency. The 2017 forecast is rather bleak, with consensus betting on a slight decrease against the US dollar for Q1 and Q2, while HSBC even predicts a fall to thirty-year low US$1.10. Furthermore, the currency’s volatility should increase over the coming weeks owing of Theresa May’s conflicting declarations, and to the Supreme Court ruling on whether the UK Parliament should be consulted before triggering Article 50.
How will the UK and its European counterparts handle the leaving process? The answer very much depends on the latter’s own interests.
European Union Countries
In contrast with the UK, the EU’s developed countries seem to have a more positive outlook. The rising industrial production in Germany, bolstered by a 1.5 per cent surge in construction, illustrates the current European economic recovery.
In fact, in its autumn forecast, the European Commission expects GDP growth in the euro area at 1.5% in 2017. This is likely to positively impact the major EU indices such as CAC40, which investors should favour for the coming months. Economic recovery in France, coupled with sales growth from a weakening euro, should drive French equities up.
While these positive signs are likely to strengthen the euro, too much uncertainty dampens the reasonableness of the forecast. Indeed, the election of Donald Trump as the president of the US brings a great deal of risk as the future of Europe’s export situation is largely dependent on his future policies, namely whether he would seal off the country and limit free trade.
Moreover, EU countries’ performance will ultimately be dependent on the outcome of Brexit talks and of French elections. If Marine Le Pen (the populist French far-right leader) were elected in May, the Eurozone would be strongly jeopardised. Security, given the high terrorism threats, is also a concern for tourism and general consumer sentiment.
US & Canada
The big question mark in Northern America is clearly the decisions Trump will make regarding monetary, fiscal and industrial policies. He has vowed to boost US spending on oil which has brought a positive outlook for oil (graph below), despite the uncertainty surrounding Saudi Arabia’s supply levels. The US economy as a whole should benefit from such policies with potential decreasing unemployment and increasing consumption levels.
Consequently, US stocks are expected to increase. In particular, with consensus believing S&P 500 should rise to 2,400 points in 2017.
Last, Canada’s economy should also grow this year, and so should its equities, boosted by the increase in oil price. The Toronto S&P/TSX composite index has rallied nearly 28 per cent since January last year, and is expected to reach 16,000 points by the end of 2017.
The outlook in Oceania is more uncertain. While Australia has typically been thought of as recession-proof for the past 25 years, things could change with the impending threat of a trade war between the US and China, which would hurt Australia’s economy by negatively affecting its largest trading partner. Restrictions, such as tariffs and quotas, by the US on Chinese goods could force China to ‘balance its books’ and import less of Australia’s mining production, which amounts for 4.5% of the GDP.
One way Australia could react to China’s fall in demand for commodities would be to depreciate its currency to remain competitive.
Analysts predict the Australian dollar to fall to at least 0.70 in 2017.
However, this should not impact the ASX200, which is predicted to hit 6,000 by the end of 2017 according to Credit Suisse, as current low trading multiples should drive Aussie equities up.
Trump’s Presidency and Brexit Negotiations
Much of the developed countries’ performances in 2017 will depend on what transpires from these two affairs. Most things are still in the air: Article 50, a potential US-China trade war and global oil production. The rise of nationalism and protectionism in Europe could also threaten the European project. Hence, because of the high volatility involved, we recommend a careful monitoring of the markets and of the relevant news, as well as a quick reaction to new information that transpires. 2016 saw several shocks, and 2017 is sure not to disappoint.
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