An extract from finnCap's "Investment Ideas for an uncertain 2017"

Macro Classifications: Economic Data, Indices and Markets, Foreign Exchange



By Raymond Greaves, Head of Research at finnCap


10 for 17


As always at the start of a year, there are significant uncertainties about the year ahead but I think in 2017, the level of uncertainly has decisively moved up a gear. In fact, a leading economist at the LSE, Ethan Ilzetzki, was recently quoted as saying “I view the current global economic environment as the most uncertain in modern history”. Wow.

 

The source of most of the uncertainty appears to be geo-political in nature:


• The Brexit vote highlighted deep dissatisfaction in one of the leading counties in the EU, which provides a very uncomfortable backdrop for leadership elections in France and Germany (and possibly Italy) in 2017. The fate of the EU possibly lies in the balance;


• The UK is likely to serve Article 50 by the end of March. Only three months from this momentous event, the High Court is deliberating over whether it is actually constitutionally possible to do this without Parliament voting on it. Further, once Article 50 is served, we are none-the-wiser as to whether this is a one-way path or if it can be rescinded if an acceptable deal cannot be agreed with the EU. Additionally, it is not even clear if we remain a member of WTO if we leave the EU. Ploughing ahead with extracting the world’s sixth-largest economy from the world’s largest trading bloc in the face of such massive unknowns is spectacularly bold, to put it very politely;


• With Trump to take office later this month, the door will open to a whole new world of geo-political uncertainty, given his apparently protectionist stance towards world trade and his provocative stance towards the easily-bruised Chinese. It will be a fascinating, if not particularly pretty, show to watch. 

Against this backdrop, UK equities appear to have performed relatively well in 2016 (FTSE100 +14%, FTSE All Share +12%, AIM100 +16%, AIM All Share +14%), but it is worth reminding ourselves that with Sterling down c15% on a trade-weighted basis, all UK markets were flat/down on the year in US Dollar terms. This made the UK the worst-performing major market in 2016.


Commodities finally found a bottom early in 2016 and began a rally which gained real impetus given some rare discipline from OPEC and the likely new era of fiscally stimulative ‘Trumpanomics' in the US. The result was the Mining and O&G sectors being the best-performing sectors in 2016. Anglo American, Glencore and Billiton were the worst performers in the FTSE100 in 2015, but were the best performers in 2016, rising 280%, 200% and 70%, respectively.


The prospect of Trumpanomics also drove a sustained rally in sovereign yields in Q4 2016: the benchmark US 10-year bond yield leapt from 1.8% pre-election to 2.4%. Not surprisingly, this triggered a sharp rotation into more cyclical stocks and financials. This theme seems to have further to run into 2017.



The information contained within this post is based on personal experience and opinion and should not be considered as a recommendation to trade nor financial advice.