Tuan Huynh, CIO, Asia Pacific, Deutsche Bank Wealth Management
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We see three key trends in 2017. First, the world is likely to continue redefining globalisation. Second, economies’ domestic fundamentals will be important. Third, markets will watch for further developments in government and central bank policies. But this will be market where – if you can steel yourself for periods of volatility – there will be opportunities.
Reconsidering globalisation
The year 2016 was not bad for global economic growth and 2017 promises to be a better one. We believe that global growth should modestly improve to 3.5% next year from 3.1% this year. The improvement will be led by the US, supported by a healthy labour market, elevated consumer confidence, healthy consumer spending and an improving manufacturing sector. Growth in Europe will be more muted, but the Chinese economy is likely to prove resilient. Growth in several other major emerging markets will pick up, despite sluggish world trade growth. One underlying theme will be gently rising inflation.
Even so, people in many countries are likely to continue to challenge the economic status quo. In particular, the Brexit referendum and the US election – two key events in 2016 – showed that many people are increasingly concerned about further global economic integration. In his presidential campaign, Donald Trump promised to scrap the Trans-Pacific Partnership (TPP), and review other trade agreements, such as the North American Free Trade Agreement (NAFTA). Similarly in the United Kingdom, newly-elected Prime Minister Theresa May has pledged to find a blueprint to leave the European Union. Markets will watch for how this trade-related rhetoric is implemented in 2017.
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By GlobalDataDomestic fundamentals a key differentiator
Given the perceived risks to world trade, markets are also likely to increasingly focus on individual economies’ domestic fundamentals. The gradual slowdown in world trade growth over the last decade provides another reason to focus on domestic growth.
Markets with strong consumer spending as well as investment growth should continue to outperform. For developed markets, this gives the advantage to the US as compared to Europe or Japan. For emerging markets, higher growth rates may be counterbalanced by concerns around protectionism and capital outflows. Countries with solid fundamentals, in current/fiscal accounts and FX reserves, should still outperform the rest. Looking beyond fundamentals, the outlook is also brighter in Russia and Brazil as they emerge from the cyclical downswing.
Policy divergence
The year 2017 will also be characterised by further policy divergence. In the US, markets have priced in an expansionary fiscal stance from the new administration. Rising inflation expectations, and better employment conditions should also see the US Federal Reserve hike rates once or twice next year.
In contrast, the European Central Bank is likely to extend its asset purchase program until September, before a gradual reduction of purchases. The Bank of Japan and Bank of England may also look to further policy easing to support uncertain growth expectations.
Policy divergence will also reflect differing views about how to boost longer-term growth. Many economies still need structural reforms to boost their strategic prospects. Medium-term efforts to boost growth through consumer spending (for example in Japan) will not remove the need for this.
Governments will in addition need to manage potential imbalances. For instance, China managed to increase 2016 growth by loosening credit and fiscal policies. But it now has to manage and reduce excessive growth in some areas, for example in the housing market. This will demand a process of continuing policy reassessment.
Policy moves will either reflect or anticipate political change. This will happen around the world. But in 2017 the political focus is likely to be on Europe. Several major European countries, such as Germany, France and possibly Italy, will hold important elections. Gains by anti-establishment parties could see market concerns on Europe escalate. Also keenly watched will be China’s National Congress in the second half of the year.
Opportunities and risks
At Deutsche Bank Wealth Management, we are cautiously optimistic as we head into 2017. Gains in equities may be limited as overall valuations are stretched, so we now need to see further improvements in earnings. For fixed income, there is a need to be even more selective than before, as yields rise up. Periods of volatility will be a feature of 2017, despite the generally supportive economic backdrop. But this will create opportunities as well as risks.
