Danske Invest’s chief analyst gives his take on the financial markets for the coming year.
“Going into the new year we can note decent growth and an improved global economy compared to the start of 2016 – and we expect global growth will be supported on several fronts in 2017,” says Jan Holst Hansen, Danske Invest’s chief analyst.
Below, he presents an overview of his expectations for the coming year.
A more robust manufacturing sector and support from fiscal and monetary policy will be the main focal points in 2017. Manufacturing is reporting increased orders and rising producer prices and demand, which will support growth. We expect fiscal policy will remain expansive this year, though we do not foresee any further easing of monetary policy.
ALLOCATION & ASSETS
We enter the new year with a modest overweight in equities in the developed markets. We do not expect yields to rise drastically in 2017 and estimate the correction in the bond market – with yields rising and bond prices declining – is almost finished. We are generally neutral on corporate bonds, though we prefer bonds issued in Europe to those issued in the US. We still see value in emerging market government bonds issued in local currency, as yields are high and the currencies are cheap.
Our eyes are very much focused on fiscal and monetary policy in Europe. The European Commission has announced that going forward it will support an even more expansionary fiscal policy than in 2016. This is a green light for yet more leeway in government budgets and will allow countries to prioritise growth over sustainability in public finances and thus support the continuation of expansive fiscal policies that benefit growth. We also expect the ECB to maintain its accommodative monetary policy stance in 2017. Another theme for the European economy this year will be political uncertainty, as Europe again faces a number of important votes in 2017, this time elections in France, Germany and Holland. Overall, we expect European growth in 2017 to be on a par with 2016.
The big question following the election of Donald Trump as the country’s next president is which elements of his political agenda will be realised. Trump’s comprehensive tax package looks most likely to become a reality and could have a moderately positive effect on the economy in the second half of 2017. We expect to see overall growth of around 2.5% in the US in the coming year, in part supported by a strong labour market performance. We expect the US central bank will hike two to three times in 2017.
We expect China will keep both fiscal and monetary policy accommodative, and should the economy slow, China will ramp up investments – particularly in infrastructure – to achieve its 6.5% growth target. Focus in the second half of the year will be on the National Congress, where many of the country’s political leaders are set to be replaced under president Xi Jinping. We are not expecting any change in China’s policies or the country’s rate of growth before then.
In the other emerging markets we expect central banks to begin easing monetary policy in 2017, which will support growth. One underlying uncertainty is the risk of US protectionism following the election of Trump, while rising US interest rates could put pressure on emerging market economies. Overall, though, we expect emerging market growth to be considerably higher in 2017 than in 2016.