Always a dangerous hobby, but it seems fund management groups just can’t stop trying to predict the future ! We wonder how accurate these predictions will be….
After a turbulent and unpredictable 2016, Charles Stanley’s Chief Investment Officer Jon Cunliffe takes a look at what could be in store for global markets in the year ahead.
If there is one lesson to learn from 2016, it is to expect the unexpected. Britain’s vote to leave the European Union and the election win by Donald Trump seemed unlikely just 12 months ago – and both had a considerable impact on markets.
The year started with a global growth panic over prospects in China and a continued slump in the oil price. But Wall Street managed to hit a series of new highs by the end of the year and China fears came to naught.
Charles Stanley (CS) is upbeat on the prospects for shares and expect the FTSE 100 to reach 7,400 before the end of the year. Better global growth and a resilient UK economy, aided by the significant ease in UK financial conditions we have seen in 2016, such as a fall in the value of sterling and a post-referendum interest-rate cut, should help corporate earnings.
The sectors they expect to perform the best are cyclical, such as industrials and materials. They will benefit from better economic activity and extra infrastructure spending. In addition, financials should benefit from higher bond yields, with US banks in particular boosted by expectations of looser regulation under a Donald Trump presidency.
The sectors they are less positive on are the pharmaceutical and utility companies which have benefited the most from the decline in bond yields in recent years. However, CS would continue to favour holding a selective allocation to those companies offering superior dividend growth.
CS believe that UK inflation will not rise as far as many forecasters expect and are more bullish on UK growth than the Bank of England for 2017, expecting it to be 2% or so. One reason why they expect inflation to be relatively well behaved is to do with the intense competition in the retail sector and the challenge from the internet. So, while sterling’s weakness will inevitably cause a significant increase in import prices, much of these will not be passed on to the consumer. This will, however, have a knock on effect on retailer’s margins, which will continue to be compressed, making them cautious on high-street retailers.
We believe the US dollar will continue to rally, particularly on a trade-weighted basis, which is weighted according to the importance of the trade with the various countries involved. Our expectation that UK fundamentals will remain favourable supports CS’s view that sterling will keep pace with the US currency and outperform most other major currencies.
A stronger US dollar is not necessarily negative for emerging markets. For the first time in a number of years expect to see a reacceleration in activity in these fledgling economies which will be supported by a better outlook for commodities – with the notable exception of gold – and an increasing benefit from strength in the technology sector, particularly in Asia.
Higher interest rates, particularly in the US, will increase the cost of holding precious metals and a stronger dollar will tend to depress their price.
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