Market direction in 2017?

Even though the equity market is looking expensive most commentators are very positive about prospects for 2017. There are however several things that could change the mood of this market.

The following are some economic/political risks for 2017. The questions to ask are:

  • will the failure of Italian banks cause the next economic crisis?
  • can China solve its more serious problems and continue to grow?
  • how will further crises in the Middle East affect world growth and stability?
  • can the European Union handle political instability and more refugees?
  • what impact will a Trump presidency have on world stability and growth?

The above are the critical questions to ask if we try to understand the trend of equity markets in 2017. Of the five points, perhaps the critical one is the unknown Trump factor. Trump remains an enigma with policies aimed at improving job prospects and profitability in the United States and given his unpredictability there are some concerns. Of primary concern is the threat to cancel free trade agreements which carries the risk of increased international protectionism and depression of world trade.

The China risk to Australia is elevated under a Trump presidency. After a year where there was a huge stimulus injected into the Chinese economy it is likely that the Peoples Bank of China will withdraw stimulus and generally tighten the economy which will create a slowdown in credit growth. President elect Trump has accused the Chinese of currency manipulation. If as threatened, he does invoke tariffs on Chinese goods entering the United States, it will be an additional effect which will further slow the Chinese economy.   Australian investors need to be keenly aware of changes in the Chinese economy in 2017.

If the Chinese economy does slow significantly then the price of commodities generally will fall. The Australian economy is very dependent on China and is strongly correlated with demand for mineral resources, particularly iron ore which is Australia’s largest export earner.

Aside from China, the other threats to economic and political stability mentioned above, must be considered possibilities. When these factors are considered there can be less confidence that 2017 will be a bull market year. It is probable that a “Trump rally” will continue for a few months but given the uncertainties that surround this new president, it is likely that 2017 will be a year of volatility and will not be easy for investors.

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