The past year has presented something of an up-and-down ride for investors.
Despite a China-led sell-off at the start of 2016, equities over the course of the year benefited from a combination of central bank support and reduced volatility. A November/December rally was driven largely by events in the US and the perceived pro-corporate policies of President Trump. A lot of this optimism has now been priced in, especially for financials and the energy sector. Nevertheless, we retain a generally positive outlook for global equities on the assumption that central banks can continue to maintain the current stable policy environment. In the US this means slow but steady increases in the interest rate rather than sudden moves in either direction.
In commodities, there were two significant factors at play in 2016. In China, the ability of the Chinese Communist Party to engineer stability even in the face of decelerating growth was a crucial tailwind for demand. On the supply side, OPEC’s tentative agreement to curb production helped oil return to the US$50-a-barrel range, a level of support we expect to extend into 2017 assuming output can be curtailed.
In debt markets, a post-US election government bond sell-off was interpreted by some as part of a “great rotation” into higher risk assets. Nonetheless, we would note the sell-off was largely restricted to sovereign debt while niche areas such as inflation-linked bonds actually performed well. Looking forward, we would highlight long-term structural factors such as pension deficits and global ageing that argue for sustained demand for fixed income products.
Meanwhile, political risk remains key – with uncertainty over everything from US trade policy to rising Chinese capital outflows, European elections to the need for continued reform in emerging market economies.
Raman Srivastava – Standish, a BNY Mellon company