Equities are buoyant despite rising political risk

To date investors appear to be giving Donald Trump the benefit of the doubt, emphasising the positive impact of his proposed fiscal stimulus measures rather than any potentially damaging trade proposals he may enact. We believe this is a leap of faith. Instead we are heading into 2017 cautious on the prospects for global equities. Ahead of key elections this year, equity valuations in the eurozone are not cheap compared with their long-term average. In contrast, investors have started to penalise UK-focused stocks as Brexit negotiations approach.

The road ahead for bond markets

In recent years economic growth has been lacklustre and inflation lower than expected. Bonds have defied expectations and at times delivered returns that have exceeded equities. However, with government bond yields still low they are likely to underperform in many scenarios. Little other than a recession would see them earning positive returns and we see little chance of a downturn this year. Increasing inflation expectations tend to be bad for government bonds but high yield credit and inflation-linked bonds can perform well in an inflationary environment. On balance, we believe investment grade credit offers the best risk-reward profile heading into 2017 with high yield bonds a close (but riskier) second.

The emerging markets conundrum

A Trump presidency would harm emerging markets this year in three ways: increased protectionism; changing patterns of global capital flows; and the impact of a strong dollar. EM equities started to look more attractive last year and were outperforming developed markets. Federal Reserve tightening may appear to be a risk, but they have outperformed developed markets through the past three tightening cycles. The question remains, should investors continue to invest in EMs because the fundamental case looks strong or sell to protect themselves against the risk that Trump pursues policies which are negative for EM growth?

The resilient UK commercial property market

UK commercial property values grew by 2.4% in the first half of 2016, but gave these up after the European Union referendum. Activity recovered in the third quarter and the sector has been more resilient than many expected. At the sector level, central London property is suffering from uncertainty over whether international firms will relocate and high-street retail and shopping centres have continued their downward trend as consumers shift online. This has underpinned demand for out-of-town warehouses and logistics centres.

The green revolution

Although costs for electric vehicles have reduced, purchase prices remain a barrier. However, better, cheaper batteries and government targets have increased the popularity of electric vehicles, with far reaching implications. These include the impact on oil prices, demand for lithium for use in batteries, as well as the business models of existing car manufacturers. Drivers in towns and cities may decide to use Uber and car clubs like Zipcar, rather than continue private ownership.

Julian Chillingworth is chief investment officer at Rathbones