Global equity outlook 2017
Global economic growth is moving slowly but finally it is emerging with most economies. This is quite different from the past few years. Also, it appears that global economic growth set to improve more than what we have been experiencing in the past few years. However, this improvement should be supported by steady consumer spending, increase in employment and household strength in the United States, commodities producing countries, a rebound in economic activities in the Europe and continued accommodative monetary policies by non-US central banks.
The US economic cycle has been the longest in recent memories. It is going into 2017 with steady growth and falling unemployment. The economic expansion is most likely to continue even in the face of the Federal Reserve raising interest rates. Although the pace of economic growth may not be that strong but there are signs of optimism for the US economy and global equity markets under new president. If global growth does not accelerate then more fiscal stimulus measures will be introduced rather than easing monetary policies.
Some commodities producing economies and emerging markets may see their economies rebalancing followed by structural reforms. Many developed economies are slowly coming out of the disinflationary pressures they been facing over the past few years. In the United States, hints of wage growth, encouraging employment data and an overall build in key inflation gauges have led to growing market sentiment that the US Federal Reserve is on track to raise interest rates further in 2017.
The eurozone and Japan have exhausted their monetary policies and most likely that they will introduce some fiscal measure to bolster their economic growth. I believe that fiscal stimulus should be used to spark inflation along with financial repression to keep real interest rates negative. It seems that they years of austerity measures are over. European Central Bank President Mario Draghi recently appealed for more expansive budgetary policy. Meanwhile, Japanese policymakers announced a fiscal stimulus package, and the Bank of Japan commenced efforts to engineer a steeper yield curve i.e., increase the differential between longer-term and shorterterm government bond yields.
Although there are some concerns about low global economic growth, high governments debts and political uncertainties as well as an aging US bull market in stocks and elevated equity valuations relative to history in key sectors, it appears the general consensus of equity market investors is that caution seems warranted. The recent rallies in oil and commodity prices and the improvement in the private sectors access to money and credit have eased some short-term risks but still there are challenges over the longer term.
The recent rallies in global stock markets have stretched equity valuations and it appear to be pricing in strong economic and earnings rebounds, while relaxed central bank policy seems to be reflected in the prices of many global equities. Investors should focus on and analyze very carefully those stocks that are rightly positioned to take advantage of an accelerated global economic growth. Using a bottom up approach might uncover great investment ideas but also applying a top down approach to take advantage of a rebound in inflation that might drive the global financial markets in the years ahead.
In an inflationary environment, equities historically have generally fared better than many other asset classes in particular fixed income bonds. This kind of economic environment should be favorable for banks, financial institutions, commodity related economies and consumer cyclical sectors. As for the US industrials and infrastructure related sectors should benefit from the promises made by the newly elected US president. Industrial companies should be the key beneficiaries of potentially higher growth and expanding infrastructure spending. I believe a potentially stronger US economy offers a positive dynamic for many other economies and markets, allowing for a potential shift in equity market leadership from the United States to other parts of the world.
Obviously, there are lots of uncertainty surrounding the speed of global economic growth and the duration of the current economic cycle and its expansion but I think the trend has changed and at present there are more support for equity investments than there was over the past few years.@Rasameel