For those fearing chaos in equity markets following the unexpected US election results, the initial response has been reassuringly calm – even buoyant.
US markets, followed by other developed markets, seem to have bought into the idea that the Trump administration will be reflationary. As a result, sectors that are more cyclical in nature and seen as more likely to benefit have come back into vogue at the expense of ‘bond proxy’ safe dividend paying shares. Likewise companies that could benefit from an infrastructure boom or a roll-back of financial regulation have done well.
That optimism is underpinned by the hope that these pledges will become policy – in spite of caution among Republicans regarding increased public spending and any increase in taxation to pay for it. It also depends upon the policy’s success in stimulating growth and healthy levels of inflation. It also assumes that returns in alternative asset classes remain subdued.
All these assumptions could turn out to be correct. But if the market has got it wrong there could be room for disappointment – and volatility – as we move through the year. While 2016 was a year of political uncertainty in developed markets (with relatively subdued impacts on equity markets), 2017 will see many macro concerns continuing. Think of the future of the euro, the nature of Brexit, prospects for Chinese growth – and new risks in the form of important elections in France and Germany.
So, while the outlook for equity markets 2017 may look surprisingly benign for now, companies need to be prepared to be agile and to be able to tune their investment cases for a range of different environments as the year unfolds. Last week the Bank of England’s chief economist warned of the dangers of assigning too much certainty to short term economic forecasts – it is a timely warning given the uncertainties ahead and most businesses will recognise the ability to be nimble and able to adapt to a wider range of plausible scenarios in strategy and communications.
If 2016 was the year in which we learnt never to say ‘it’ll never happen’ ever again, 2017 may see investment cases tested again under volatile market sentiment.