Market outlook for 2017

Global markets face plenty of challenges in 2017, with continuing uncertainty over Brexit, the impact Trump will have as president, and key elections in Europe. Here, we consider what may lie ahead for some of the biggest investment sectors next year.

  • 21/12/2016

Investors faced a series of stock market surprises over the past year, with the UK’s vote for Brexit, followed by Donald Trump’s presidential victory in the US, both causing plenty of market turbulence.

Further upheaval could well lie ahead as Britain’s departure from the European Union is negotiated and, alongside elections in Europe, 2017 looks likely to be another momentous year in global economics and politics.

The UK

Since the UK voted to leave the EU on 23 June, there’s been widespread speculation about how and when Britain will officially begin the process of Brexit. Prime Minister Theresa May announced that Article 50, the UK’s formal resignation from the union, will be triggered around March.1

Once the process of withdrawal from the EU is started it is expected to take up to two years to complete. May has stated that immigration will be a focus of Brexit, above securing access to the single market, yet the outcome and deal the UK will achieve from Brexit is yet unknown.

However, the International Monetary Fund forecasts that the uncertainty over trade, immigration and foreign investment will lead to a short-term loss of momentum. It expects a fall in GDP growth in 2017 to 1.1%, following 1.8% growth in 2016.2

This poses risks for the UK economy and could plague financial markets. Meanwhile, the slump in sterling threatens higher inflation.3

However, low interest rates and the prospect of increased infrastructure spending should help alleviate some investor concerns, despite the economic uncertainty that could dominate the year ahead.

The US

In the aftermath of the US election, all eyes are on Donald Trump to see which policies he will pursue in 2017.

Markets have so far benefited from Trump’s focus on deregulation and infrastructure spending, and last month the Organisation for Economic Cooperation and Development (OECD) revised its US growth forecast upwards.

The group expects the American economy to grow 2.3% in 2017, and 3% in 2018, compared to 1.5% this year.4

Plenty of other forecasters agree that Trump’s presidency could boost economic growth, bringing in higher interest rates and inflation. Some experts predict three separate quarter point rises in interest rates before the end of 2017.5

However, any economic progress could be de-railed if Trump turns his attention to his potentially riskier protectionist policies such as dismantling the North American Free Trade Agreement (NAFTA).6 If he does restrict trade or immigration, this could have a negative economic impact, resulting in higher import costs and shrinking markets for US exporters.

Emerging Markets

Emerging markets produced substantial gains for investors in 2016, and investors may be encouraged by previous trends in these stock markets, which tend to out-perform for an extended period.7

Of course, past performance should never be seen as a guide to future performance and this highly volatile sector has experienced multiple years of underperformance too.

Risks facing emerging markets in 2017 include rising levels of Chinese debt and a strong US dollar.8 This provides a financial headwind for commodity prices, which are priced in dollar terms, so prices should move lower when the dollar strengthens to reflect its increased purchasing power.

Any protectionist trade measures that are put in place by Trump risk damaging their economies. The US is an important trading partner, and there remains much uncertainty over his future policies on global trade and tariffs.9

Expectations that the Federal Reserve will raise US interest rates are also likely to impact investor confidence in emerging markets, as higher US interest rates make it more expensive for emerging market borrowers to service their debts.

Europe

Europe faces great political uncertainty over the next 12 months with major elections and calls for further referendums across the continent likely to cause jitters among investors.

French citizens will vote for President François Hollande’s successor in spring 2017. A victory for Marine Le Pen, leader of the National Front party (FN) could have particularly significant implications across Europe, given she’s promised a “Frexit” vote within six months if she wins.10

Germany’s election is also one to watch. The earliest possible date to elect members to the Bundestag - the federal parliament of Germany - is August. Current Chancellor Angela Merkel is expected to win, if she runs.

However, far-right party, the Alternative for Germany (AfD), has been gaining increasing public support in polls. The liberal Free Democrats have also gained momentum since their defeat in 2013. As a result, the major parties may shrink in representation, with the Bundestag able to hold Merkel back or sway the outcome of subjects ranging from Brexit to the future of the EU.11

Alongside these challenges, there are a number of other issues that continue to impact the market, including the Eurozone’s sovereign debt crisis, persistently low growth and the ongoing refugee crisis.

Please remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.

If you already have an account with us, please log in. If not, you can find out more about the accounts we offer by visiting our website.