Last year, many experts and "prophets" were proved wrong with forecasts that were presented as certainties: they failed to predict the massive fall in yields at the start of the year, Brexit, the outcome of the US presidential election and the massive rise in yields at the end of the year. It will not be easy this year, either (although it never is). There is plenty of potential for surprises.
Negotiations over the UK’s exit from the EU are expected to begin in the spring, while Italy faces major challenges: the new government formed by Paolo Gentiloni is already unpopular, which increases the likelihood of fresh elections. There will also be elections in three other key EU countries, namely the Netherlands, France and Germany. Meanwhile China, the world’s second-largest economy, is in the process of restructuring. The new US president is not helping here, having announced his intention to impose higher tariffs on large trading partners. His electoral promise was to enter into fair, bilateral trading agreements that would bring jobs and industry back to the US. Globalization and world trade are already on the decline. If it actually came to a trade war, it would be a disaster for the exporting economies. Trump’s intended financial policy (to slash corporate tax from 35% to 15% and repatriate earnings to the US, subject to a 10% one-off charge) could also lead to large capital flows and volatility in the financial markets. Combined with massive infrastructure projects, this would send US national debt through the roof.
However, the financial markets currently seem to be focusing mainly on growth. Some of the projects announced will no doubt be carried out in the first half of the year, but a lot of the plans will take a while, and the US Congress is not exactly known for being fast-moving. On the positive side, much is already priced into US interest rates, and at current levels they appear attractive as an investment again – despite the uncertainty. Because the uncertainty remains: that, at least, is certain.
Author: Ewald Dür, Portfolio Manager LGT Capital Partners