2016 Review: some surprising events but ok overall
2016 will undoubtedly be remembered as a year of unexpected outcomes, particularly in a political context. The sudden rise of “populist politics” delivered a number of surprising vote outcomes around the world including the election of Donald Trump as the 45th President of the United States and the UK’s decision to leave the European Union.
Coming into 2016, many economists predicted a number of potentially disastrous events that could derail the global economy through the year. These included the risk of deflation, the US Federal Reserve rapidly increasing interest rates, commodity prices continuing to crash, the Brexit vote curbing global growth and the election of Donald Trump causing share markets in the US and around the world to crash.
Fortunately, many of these events did not occur and for those that did, the predicted outcomes did not eventuate – Brexit did not cause global growth to collapse, in fact, despite an early scare, global growth continued at around 3% pa, helped by stronger than expected growth in the US and a stabilisation of growth in China.
Although all asset classes made positive returns over the 12 months to 31 December 2016, volatility remained very high making for a bumpy and at times uncertain journey for investors throughout the year.
Outlook for 2017
Early indicators suggest that 2017 may continue to improve on 2016. Global growth is predicted to tick just over the 3% mark this year as key indicators such as business conditions and manufacturing activity continue the momentum they found towards the end of last year.
Although the US Federal Reserve is likely to raise interest rates multiple times throughout the year, we anticipate the effects of this will be offset by a the Trump administration’s significant planned fiscal stimulus program. Outside the US, we expect that monetary policy will remain generally easy. Overall, we expect global shares to trend up during the year, with the strongest gains likely to come from Europe (which we currently view as substantially undervalued as a result of fears that more countries may leave the EU – we do not view this as likely at this stage).
In Australia, the economy will continue its transition away from mining investment. Increased resource exports and continued high volume of construction in the housing and infrastructure sectors should support economic growth. We expect general earnings growth to be around 8-10% which bodes well for Australian shares. We anticipate the S&P ASX 200 will trade in the range of 5,600 to 5,900 throughout the year.
Of course, 2017 will not be without its risks. Chief among those is the somewhat unknown an unpredictable economic policy of the Trump administration. In particular, there is concern that Trump may spark a trade war with China which would negatively impact global trade and crimp growth. Other risks include potential surprise outcomes for elections in a number of key European countries including France and Germany, a rapid deceleration in Chinese growth and the ongoing geopolitical issues in the Middle East and South China Sea.