Politics more crucial than ever in 2017
WHEN future investors look back at 2016 they might conclude that it was a decent year, with the FTSE 100 index on course to make double-digit gains and gilts more than seven per cent ahead, but the journey to those returns was anything but straightforward.
If they dig a little deeper they will find that it was very much a “game of two halves”. In the first half, a deflationary mindset prevailed, with bonds, bond proxies, high-yielders and growth companies leading the way. In the second half, it was cyclical sectors such as banks and miners that benefited from growing support for more reflationary policies, epitomised by Trump’s election victory. Our view is that there is a bit more left in this rotation.
Reflationary sentiment will be underpinned during the early weeks of the Trump presidency as more policy is presented, and more growth-friendly policies will also feature in the election campaigns of the Netherlands (March), France (April/May) and Germany (September/October). Politics will continue to exert a stronger influence on markets.
Elections and referendums increase volatility because they are one-off events, and, as political opponents become increasingly polarised in their views, the outcomes are also increasingly asymmetric. Just to increase the uncertainty, investors have not always successfully predicted the market reaction to a given result, with the Trump rally being a case in point.
By “asymmetric” I mean the fear is that the “wrong” result in any of these upcoming elections sets off a chain of events that disrupts the status quo, creating much more downside risk than upside potential. In the case of Trump it was the fear that protectionist policies might undermine global trade. So far, so quiet on that front, although it’s still early days.
When it comes to the Netherlands and France, there is a risk that a win for the “wrong” candidate leads to a referendum on membership of the EU and/or the euro zone, which would create far greater turmoil. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment