Donald Trump’s election to the US Presidency has been cheered by investors. We maintain a constructive view on the reflationary macro environment, which is favourable to risk-taking.
Going forward, given the sharp re-pricing that has already taken place in financial markets, we will be carefully monitoring the two risks to this trend: US dollar strength and protectionism.
OPEC ’s decision to cut production should put a floor on oil prices – supporting our recently-initiated long position in commodities.
Intensifying protectionist threats are testing recently renewed investor confidence in emerging assets. We remain overweight based on improving fundamentals and the stabilisation of the commodity complex.
Cyclically, the policy changes promised by the next US President could serve to vindicate Abenomics – enhancing 2017 prospects for the Japanese economy.
The Bank of Japan (BoJ) is now the undisputed pro-cyclical leader of the western world.
Longer term, however, Japan needs much more than monetary or fiscal measures to fix its structural issues.
A constructive macroeconomic outlook for the US, commodities and China should also help sustain the ongoing recovery in emerging economies, protectionist threats notwithstanding.
Russia has regained policy credibility and stands to benefit from improving oil prospects in the medium term, but vulnerabilities remain in the longer term.
Brazil has probably seen the worst of its down cycle, but unpopular fiscal reforms lying ahead pose risks to the recovery.
Indian prospects are more promising, with pro-growth monetary policies now possible.
Politics have taken centre stage in the Eurozone, rocking Italy and promising testing times in the lead up to the French, German and Dutch general elections.
Economic fundamentals are more sanguine, allowing for a scenario of continued moderate recovery – perhaps even helped by fiscal tailwinds in 2017.
The start of “Brexit” negotiations could hurt UK growth prospects, with cyclical weakness compounding the country’s structural imbalances.
Peaks in corporate profits, employment and bank lending had been signalling increasingly precarious late cycle conditions in the US.
Donald Trump’s intended stimulus plan will put the economy on a temporarily – not permanently – higher growth path.
While the Fed has shifted to a more neutral stance, letting fiscal policy take over, it will likely remain data-dependent in its interest rate policy rather than trying to preempt a pick-up in inflation.
Financial markets have rarely seen such a bad start to the year as in 2016, with fears of a hard landing in China, falling oil prices, an industrial recession in the US and fragile solvency in the European banking sector alarming investors. As the months went on, however, the global economy demonstrated its ability to avoid these pitfalls and maintain a modest but stable pace of growth, supported by still-accommodative central banks. Political shocks then succeeded economic fears.
Looking ahead to 2017, Lombard Odier’s Chief Economist Samy Chaar, and Head of Investments, Stéphane Monier, present our central scenario, and analyse the main risks.
‘Impact investing’ is on the brink of mainstream success. Investors are already tuned into the dangers of investing in companies with poor corporate governance. Now societal trends, regulatory change and emerging measurement frameworks should encourage impact investing to thrive.
ITALY VOTES AGAINST CONSTITUTIONAL REFORM
On 4 December 2016, a large majority prevailed in favour of ‘no’ in the country’s referendum with 59.1% of voters rejecting the constitutional reform put forth by prime minister Matteo Renzi’s government. Renzi was quick to acknowledge and take responsibility for the defeat, announcing his intention to step down soon after the vote was confirmed. He is now expected to hand his resignation to the President of the Republic in their meeting scheduled for 5 December 2016.
Oil & Gas Equity Analyst