Reasons to be upbeat on the prospects for 2017
It is unlikely 2017 will offer as clement an investment climate as 2016 proved to be. Further rate rises are likely in the US, while the UK is unlikely to need to cut rates again or to print more money to buy bonds.
Japan may well continue with a large Quantitative Easing programme, but has made clear it wants to keep the 10-year yield at zero with higher rates for longer duration, so it is no longer trying to drive these rates down more. The German influence on the Eurozone would like to start weaning it off large bond buying programmes, though the authorities seem intent on “doing what it takes” to avoid a further deterioration in output. They may decide to taper the programmes in due course. All this makes it unlikely advanced country sovereign bonds will deliver such good returns in 2017.
There is more going for shares, despite the price rises in 2016. The world economy should grow around 3% again this year as last. Attention will concentrate on Donald Trump’s progress with reflating the economy.
So far markets have been enthusiastic about his ideas of expanded infrastructure investment and large tax cuts for both companies and individuals. 2017 will be a year which tests his skills at getting his programmes through Congress, given that some Republicans as well as all Democrats are sceptical about their new leader. It will also define what Trump actually will do on trade. His rhetoric has been menacing to free trade in general and the China trade in particular. We may find that in practice he has limited options and is talked out of anything dramatic. Overall, we expect Trump to be a positive for economic growth.
We expect the UK to grow a little over 2% this year, as last. This is out of line with the fashionable gloom about UK economic prospects based on worries that inflation will pick up, eclipsing wage growth and leading to a sharp fall in consumer activity. We think real incomes should continue to grow a bit this year. Inflation will of course rise to some extent, particularly owing to the increase in oil prices and its direct impact on driving costs.
Fears of general price rises on the back of a lower pound are probably overstated. The background is generally benign for UK companies, made more competitive by the lower pound. Jobs growth has been good and wages, bonuses and overtime have been increasing. Government has been keen to promote higher wages at the lower end.
The euro area should make some more progress with general recovery, aided by the repair of more of the damaged banks. The problems it faces are largely political, with a series of elections in the Netherlands, France, Germany and probably Italy posing a challenge to the current EU and euro area policies.
China continues to expand at a decent pace, but may this year have to announce a modestly lower official growth rate going forward. The long transition to an economy based more on services and domestic consumption, and less on industry and exports, still means pain ahead as mines and factories are closed to bring output into line with market needs.
For 2017, we favour share investments more than government bonds where portfolios can accept such risks. The arrival of Trump in office will produce changes which present opportunities as well as threats to investors.
John Redwood is chief global strategist at Charles Stanley