Mar­ket tips, bold calls and eye-catch­ers for 2017

Kuwait Times - - BUSINESS -

Pol­i­tics, eco­nom­ics and fi­nance have all been turned on their head in 2016, and in­vestors are al­ready look­ing ahead to 2017 with an­tic­i­pa­tion and trep­i­da­tion. The con­sen­sus, broadly, is that the 35-year bull mar­ket in bonds is over, in­fla­tion is back, cen­tral banks are maxed out, and for the first time in a decade any stim­u­lus to the global econ­omy will now come from govern­ments. The im­pli­ca­tions for mar­kets ap­pear to be fur­ther in­creases in bond yields, de­vel­oped world stocks and the dol­lar, while emerg­ing mar­ket cur­ren­cies, stocks and bonds are ex­pected to strug­gle un­der the weight of higher US bond yields. In eq­ui­ties, de­vel­oped mar­kets are fa­vored over emerg­ing, cycli­cal sec­tors over de­fen­sive, banks are ex­pected to ben­e­fit from steep­en­ing bond yield curves, while in­fras­truc­ture spend­ing could boost hous­ing and con­struc­tion stocks. That’s the con­sen­sus. But what goes against that grain? Where might the wrin­kles ap­pear? And even within the broad con­sen­sus, are there any eye-catch­ing fore­casts or trade rec­om­men­da­tions?

1. Bond yields to FALL?

HSBC, who cor­rectly called the re­cent slide in US bond yields to his­toric lows, says bond yields may well rise next year and ex­pects 10year Trea­sury yields to hit 2.5 per­cent. But in the first quar­ter. Af­ter that, HSBC’s bond strate­gist Steven Ma­jor reck­ons they will fall back sharply again to 1.35 per­cent - ef­fec­tively retest­ing the multi-decade low struck this year - be­cause an ini­tial rise to 2.5 per­cent would be un­sus­tain­able by tight­en­ing fi­nan­cial con­di­tions, drag­ging on the econ­omy and con­strain­ing the Fed. A bold call.

2. “Peak” 2016

For Bank of Amer­ica Mer­rill Lynch, 2016 saw “peak liq­uid­ity, peak inequal­ity, peak glob­al­iza­tion, peak de­fla­tion” and the end of the big­gest ever bull mar­ket in bonds. That all starts to re­verse next year. “For the first time since 2006, there will be no big eas­ing of mon­e­tary pol­icy in the G7, and in­ter­est rates and in­fla­tion will sur­prise to the up­side.”They even pin a date on when the bond bull run likely ended: July 11, 2016, when the 30-year US bond yield bot­tomed out at 2.088 per­cent. It’s 3 per­cent today.

3. Black Swans

Economists at So­ci­ete Gen­erale il­lus­trate a graphic with four “black swans” that could blight the global eco­nomic and mar­ket land­scape next year for good or bad. Mostly bad news. The tail risks they see as most likely to al­ter next year’s out­look stem from po­lit­i­cal un­cer­tainty (30 per­cent risk fac­tor), the steep in­creases in bond yields (25 per­cent), a hard land­ing in China (25 per­cent risk fac­tor), and trade wars (15 per­cent).

4. The euro also rises

“The dol­lar is over­val­ued ver­sus other G10 cur­ren­cies.” Not some­thing you hear too of­ten, but it’s the view of Swiss wealth man­age­ment gi­ant UBS. They pre­dict the euro will end next year at $1.20, go­ing against the grow­ing calls for par­ity (it hit a one-year low be­low $1.06 last week) or even lower. The euro will also draw sup­port from the ECB ta­per­ing its QE, while un­der­val­ued ster­ling will pick it­self up from its Brexit maul­ing to rally against the green­back.

5. The “good carry” in EM

Few dis­pute that a higher dol­lar and US yields next year will hurt emerg­ing mar­kets. Gold­man Sachs has long cham­pi­oned a stronger dol­lar and higher yields. Two of their top 2017 trade tips, how­ever, in­volve buy­ing EM as­sets. One is go­ing long on an equally weighted FX bas­ket of Brazil­ian real, Rus­sian rou­ble, In­done­sian ru­piah and South African rand ver­sus short on an equally weighted bas­ket of Korean won and Sin­ga­pore dol­lar to earn “the good carry”. The other is go­ing long Brazil­ian, In­dian and Pol­ish eq­ui­ties. —Reuters

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