2017 Financial Outlook

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January 27, 2017

2016 started badly for investors with worries about global growth and deflation. But global growth turned out okay &, despite political events, rising bond yields & disappointing Australian growth, the end result has been a constrained but okay year for diversified investors.

2017 is likely to see another year of okay & maybe even slightly higher global growth, higher inflation, higher bond yields after a pause and divergent monetary conditions as the Fed tightens but other countries stay easy. The RBA is likely to cut rates to 1.25%.

Most growth assets, including shares are likely to trend higher, resulting in reasonable returns in 2017.

What to watch?

The main things to keep an eye on in 2017 are:

  • US economic policy under President Trump – in particular whether the focus is on fiscal stimulus and deregulation as opposed to starting a trade war with China;
  • How aggressively the Fed raises rates – faster inflation could speed it up putting more upwards pressure on the $US;
  • A rapid rise in bond yields – this would be bad for shares and growth assets but a gradual rise would be okay;
  • Elections in the Netherlands, France, Germany and maybe Italy which could reignite Eurozone break-up fears if anti-Euro populists win (which I doubt they will);
  • Whether China continues to avoid a hard landing;
  • Whether non-mining investment picks up in Australia – a failure to do so could see aggressive RBA easing – and how a surge in apartment supply impacts property prices; and
  • Ongoing geopolitical flare ups, eg in the South China Sea.