Investment Banks analysts anticipate that financial markets will be affected in 2017 by three main events: Donald Trump’s performance as US President, which for most, is a big uncertainty; the first round of the 2017 French presidential election, held on 23 April 2017; and the next German federal elections, which will elect the members of the Bundestag, the federal parliament of Germany, on a date still to be determined.
These are three key events which cause uncertainty that will influence financial markets. But there are also other risks that concern investors.
1. Donald Trump: From President Elect to USA President
Donald Trump won the USA presidential elections in November 2016, with a surprise outcome. The real estate tycoon represents a “stunning repudiation of the Establishment” and will assume office in the end of January. In general, it is assumed that Donald Trump will be a far different president than any of his predecessors. However, the real impact of a Trump administration on growth is uncertain, according to Commerzbank.
It remains unclear what measures he will take, implementation will take some time and the US economy is close to full employment – likely lowering the impact of fiscal stimulus on growth anyhow. Trump is willing to cut corporate taxes and income tax, which should bring relief of $4,500bn or 2% of GDP over the next ten years according to the non-partisan Committee for a Responsible Federal Budget (September 2016). The impact of his infrastructure spending plans remains to be seen too: tax concessions are supposed to bring private investors on board rather than to raise government spending.
Whether or not Donald Trump follows through on his campaign pledges is still uncertain. Political and geopolitical risks, foreign policy uncertainty, relationships abroad uncertainty, american institutional stability, security alliances, such as NATO, China and middle east relations, as well as Europe, these are all issues that further enhance uncertainty on Donald Trump’s presidency.
2. Euro Zone Uncertainty
Following 2016 UK’s referendum BREXIT and the US Presidential Elections, in 2017 the focus will be in the Euro area, namely in France and Germany, with some probability of elections in Italy (the next Italian general election is due to be held no later than 23 May 2018). Additionally, general elections are also planned to be held in the Netherlands on 15 March 2017, to elect all 150 members of the House of Representatives, where Geert Wilders, leader of The Party for Freedom (PVV), a nationalist and right-wing populist political party in the Netherlands, is rising as a potential candidate to overtake power.
According to Morgan Stanley, continued political uncertainty and a strong Euro weighs on investment in Europe:
Continued economic weakness could weigh on capital expenditure and productivity, according to Morgan Stanley.
No growth and a stronger euro could see the Euro Area shrink for a period of three or six months, leading the European Central Bank to extend quantitative easing into 2017.
An important event will be the 2017 French presidential election, held on 23 April 2017, where Marine Le Pen, the far-right party leader is the second favourite in the race, just behind Francois Fillon. Marine Le Pen is the leader of France’s National Front (FN) and one of the clear front-runners in this year’s French presidential elections after vowing to cut immigration. Still, uncertainty is big.
3. BREXIT outcome
After the UK voted to leave the European Union in June 2016 questions began to arise about what Britain’s separation with the EU would look like. BREXIT supporters, such as Foreign Secretary Boris Johnson and Secretary of State for Exiting the European Union David Davis, support a “Hard BREXIT”. Remainers on the other hand are in favour of a softer approach. After stating that “BREXIT means BREXIT”, Theresa May confirmed that Britain’s exit from the European Union will be triggered by the end of March 2017, which will mark the beginning of two years of formal negotiations. Despite this timescale, speculation remains over what kind of relationship the UK will develop with other partners after effectively leaving the Eurozone.
More than six months have past and we are now facing a new year, uncertainty is still the best definition for the BREXIT outcome and measures taken so far. However, some economists estimate that whatever the outcome, it will most certainly affect the Euro zone and financial markets.
4. Quantitative Easing (QE)
The European Central Bank (ECB) informed in December 2016 that it will continue an extra nine months of Quantitative Easing (QE), but cutting bond purchases from €80bn to €60bn per month. The ECB has therefore assumed to continue pumping money into the Eurozone economy until the end of 2017, and longer if needed. However, this policy has its risks for the Eurozone and world economies and many voices are critics of the ECB stance.
David Folkerts-Landau, Deutsche’s chief economist, said negative interest rates and quantitative easing had hurt savers and allowed politicians to delay badly-needed structural reforms.
“ECB policy is threatening the European project as a whole for the sake of short-term financial stability,” he said in a note titled “The ECB must change course”.
It said: “The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.
“The benefits from ever-looser policy are diminishing while the litany of distortions, perversions and disincentives grows by the day. Savers are punished and speculators rewarded. Bad companies survive while good companies are too scared to invest.”
The German economist also warned that the “whatever it takes” stance taken by president Mario Draghi and the ECB had “distorted the market-based pricing of government bond yields”.
This year the world is hoping to see if the ECB policy will bring benefits, while a predicted rise in inflation will occur and therefore making a further QE extension case weaker. Moreover, not only the ECB decided to cut the bond purchase to 60bn per month but it also self imposed limits for individual countries. Uncertainty also arising from QE.
Image source: BBC
5. Emerging Markets
Some analysts predict that in 2017 revenues originating in emerging markets will increase. However, people are aware that there are posing risks in emerging markets countries (some potentially with interesting risk/reward). Analysts defend that there since the expectation are so low, it’s not difficult to overcome them. However, there are risks and uncertainties to consider. Morgan Stanley, in its Global Outlook 2017: Higher Growth, Bigger Risks wrote:
Investors can expect new momentum in the U.S. and a stronger recovery in emerging markets, but should stay nimble amid a plethora of policy and political uncertainties.
Morgan Stanley Investment Management wrote that “Until August 2016, investors poured more than $9 billion into emerging market (EM) equity funds in the six weeks ended Aug 10, 2016, the largest inflow over such a period in three years.2 The MSCI Emerging Market Index was returning 13.86%, 3 year-to-date, compared with a return of around 5% for the MSCI World Index4 and 6.7% on the Dow Jones Industrial Average.”
The theme is that there are some positive factors taking shape on investors sentiments, leading to potential emerging-market strength. Investors are therefore positioning themselves in order to anticipate these potential opportunities.
Image Source: Franklin Templeton Investmemts
6. Euro Currency (de)Valuation?
Will Euro/Dollar reach parity? This is an emerging question among analysts and investors and the risk is real. Euro and Dollar can be trading one for one in 2017. In November 2016, a 10-day losing streak for the euro against the U.S. dollar triggered this old debate. The fact is that the supposedly stimulating monetary policy imposed by the ECB in the last few years has been bringing the Euro valuation down, trying to push exportation in Euro countries. With the growing likelihood of an interest rate hike by the Federal Reserve (FED) during 2017, analysts say that the tendency is for the dollar currency to go up, while the Euro will fall, reinforcing the possibility of parity on the Euro/Dollar.
Goldman Sachs’ chief Economist defended this morning that that the two currencies will reach parity during 2017.
Jan Hatzius stated that “There’s still plenty of time, I no longer have a dovish view on U.S. monetary policy but I would say there is still a very good dovish case on Europe,“, reinforcing the message that the ECB is ultimately an inflation targeting institution.
What is your view and what big risks do you anticipate for 2017?