23 December 2016

Ring in the New

So, farewell then 2016. It has certainly proved an eventful year, with plenty of surprises and more than enough for investors to worry about.

Yet shares on both sides of the Atlantic look likely to end the year at, or close to, all time highs. You have to wonder what lies behind an apparent risk-on approach being adopted by investors.

Given the uncertainty that the UK’s decision to leave the European Union and a new US President will create, the robust nature of share markets appears at first sight a little surprising. However, it is i ncreasingly looking as though the great financial experiment that was quantitative easing might be drawing to a close and with it the return to more accepted monetary and fiscal policies. Perhaps this is encouraging investors.

The Federal Reserve Bank of America has already indicated that a more aggressive stance towards raising interest rates is likely in the year to come. The first rate rise, admittedly modest, came recently and the indications are that three more could be in the pipeline for 2017. While this can be taken as demonstrating faith in the strength of the US economy, the likely spending plans of the new President will doubtless weigh on the minds of policy makers.

If President Trump is to fulfil his pledge to restore blue collar jobs – no mean task, given globalisation and technical advances rendering many factory jobs obsolete – then infrastructure looks like being a focus. This will involve government expenditure, so little wonder Treasury bonds came under pressure after his surprise victory. But it could help the US build on its economic recovery.

Europe remains under a cloud, with general elections in Germany, France and the Netherlands due next year. Even so, markets there – and the euro, for that matter – have held up relatively well. This is a region that will need to be watched closely, though – as will Emerging Markets. While Trump’s rhetoric did cause a modest wobble there, confidence is rebuilding and valuation levels look less demanding than a few years ago.

As ever, we face the New Year with likely outcomes as opaque as ever, but with a belief that inflationary pressures may return and monetary stimulus give way to those of a fiscal nature. Investors clearly believe this should be good for shares. Bonds, on the other hand, could suffer. Whatever the outcome, we are all hoping for a prosperous New Year. And may I wi sh all our clients and readers a Happy Christmas too.

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