After a difficult year full of surprises, the analysts make their bets on what to expect from the first year of Donald Trump's presidency, the political situation in the EU after Brexit and the oil prices in the year to come.
2016 has been a difficult year full of unexpected ups and downs, with Brexit and the surprise win of Donald Trump over Hillary Clinton being the ones that will definitely find a place in the history books of the next generations. Good or bad, 2016 was definitely a year of surprises. So, what to expect from the coming 2017?
The unexpected election of a businessman with no prior political experience as the next President of the United States was definitely a big curveball for the global markets that just (partially) recovered from the June's surprise decision of the U.K. to leave the EU. With Trump officially entering the Oval Office this January, first and foremost, analysts unanimously agree that Trump's first year of presidency will be marked by increased volatility in a number of industries and markets, and that is exactly what investors should prepare themselves for. 2017, just as 2016 is quite unlikely to become the year of market stability.
According to Seeking Alpha's Wall Street analyst that preferred to not disclose his real name due to his high position on Wall Street, the president-elect is a "wildcard" and the biggest risk for the markets next year. The "Trump Rally" of this year did shake up the markets but was still relatively beneficial for some industries like Oil & Gas while the real impact of Trump's political agenda will kick in only next year. For now, the big question is which of his proposed policies he will actually follow through and how will he interact with the Congress about passing new legislations.
"The president-elect has a propensity to say what’s on his mind, regardless of whether it’s politically correct or comports with the typically more cautious language of Wall Street. Controversial statements could create uncertainty and rattle the market at times. More substantively and importantly, Trump’s actions on trade or immigration could generate market swings," Canada's RBC experts told Fortune.
On top of that, the degree of Trump's influence on the global financial markets will depend on whether he actually acts upon some of his most controversial promises, like renegotiating trade agreements as well as his stance on trading with China. From what we know, almost every major sector can be potentially affected by Trump's new policies as the president-elect has big plans towards strengthening the U.S. economy and the dollar, what has a direct connection with the changes in the U.S. economy predicted for the next year.
American economy during the first year of Trump's presidency
Some analysts believe that the new American administration led by Trump was elected to question the long-standing status-quo in both the U.S. domestic economy as well as the country's position on the global arena. In general, most analysts agree that the American economy and the dollar are most likely to have strong year ahead. According to Faraday Research analyst Matthew Weller, the president-elect will make sure to strengthen his approval rating among the Americans who voted for him during the first months of his presidency, so we will see a "massive wave of fiscal stimulus" in the shape of the promised corporate tax cuts and increased infrastructure spendings.
On top of that, the government will be likely to make a promised contribution to the national GDP, what would juice both economic growth and inflation for a short period of time and create a supportive environment for the aggressive pace of interest rate hikes of the Federal Reserve. Interestingly, the WalletHub makes quite a different forecast on that. According to the analysts, the American economy will close this year with a growth rate of 1.75%, although after the initial period of growth in the beginning of the year, the economy will be quite unlikely to show any dramatic growth rates. They give a forecast of GDP growth at the level of 2.1% for 2017, which is not much higher than what we have seen this year.
“The economy will start off well, but will likely slow after that, partly due to concerns about rising deficits and partly due to monetary policy that will tighten,” Prof. Michael W. Klein told WalletHub.
For dollar, next year will be a good one, say the analysts. On top of the greenback already soaring at 13-year highs, the plans of the Fed to complete three rate increases in 2017 are quite likely to push the U.S. national currency even higher. An analyst Anna Coulling explains that for the U.S. dollar the win of Donald Trump was the catalyst that allowed the currency to break free from the long-lasting "consolidation phase". In 2017, we can see dollar reaching a price region of between 1.045 to 1.050 against euro, added the analyst. Dollar's strength will also coincide with euro's weakness due to the internal problems of the EU (more on that later).
Next to that, the big surprise coming from the strong dollar is a weaker performance of the U.S. Wall Street companies thanks to the reduced value of foreign profits in dollar value. This means that multinational companies with a big international exposure will face lower profits due to the domestic currency strength whereas companies and sectors with a heavy domestic focus will win the preference of investors next year. Seeking Alpha's analyst Rida Morwa names Oil & Gas, Biotech and Healthcare sectors to be his "favorites". Among stocks, the analyst advises to look at floating-rate fixed income CEFs, BDC companies and commercial MREITs as the most "inflation-protected securities". Energy sector stocks were the ones to soar after Trump's win and the prediction for next year is no different. When it comes to Biotech and Healthcare, the market experts also expect some indirect influence of Trump's political agenda on this sector, with high hopes of decreased regulations (as opposed to Clinton) and easier FDA approvals of new drugs.
Apart from drastic changes in the U.S. markets due to Trump's win, the change of the political climate in the European Union triggered by the surprise Brexit vote is yet another analysts' worry for next year. According to the Economist, a group of fund managers that participated in the BofAML poll admitted that their biggest fear for the coming year was the disintegration of the European Union as we know it today. As a result of those fears, most of the fund managers said they already had a lower than normal amount of European stocks in their portfolios.
However, the continent is also on the edge of big changes that might or might not happen. The EU might get through 2017 without losing its strength if Marine Le Pen loses the presidential race in France and Angela Merkel gets re-elected in Germany, explained the experts. The main threat to the economy and thus, global markets, in 2017 is the rise of populist political leaders in a number of the EU countries, what could contribute to heavy internal conflicts among the member states. Although the recent elections in Austria, where a populist candidate Norbert Hofer lost the elections, shows that populism doesn't win everywhere.
The recent constitutional referendum in Italy that resulted in a resignation of Italian Prime Minister Matteo Renzi and the aggravation of the country's prolonged banking crisis added additional worries about the state of the European economy in the coming year. An analyst Rida Morwa said that in the situation when the economic conditions in the EU seem to be stabilizing thanks to a number of ECB's actions like monetary easing and low interest rates, the political and economic risks coming from Italy, mostly, are still a serious problem. After the failed constitutional referendum, there is a growing chance that a referendum to exit the EU could be held in Italy sooner than we think, with its consequences reaching much further than those of Brexit.
However, the euro-zone economies could still advance at a "respectable" rate of 1.6% in 2017, says the Economist. More than that, considering the economic and political turmoil in other economies, Europe might even win a name of a safe haven for the year. Although, euro and pound will still show a considerable downside potential as they are weighed down by political uncertainty. For the British pound it is going to be a difficult year (again) as the current trend toward the "Hard Brexit" does not seem to be that promising for the currency's recovery.
And, lastly, oil. Oil has made the headlines this year as the OPEC cartel and other oil-producing countries have finally reached an agreement on ending the global oil glut that weighed down the oil prices and depressed the oil markets for the last two years. Anna Coulling believes that for oil, the next year will be yet another "cocktail of politics, posturing and play acting". OPEC found a way to navigate among the multiple demands of the member states and control supply from other countries like Russia while the price war among the bloc and alternative producers is still there. If OPEC limits the supply too much, what would result in higher oil prices, this will encourage the alternative suppliers to produce more, making it a vicious circle, explains the expert.
Esekla analysts say that the big question for 2017 is how long OPEC's "honeymoon" will last. The two risks that the oil cartel will be faced with is internal controlling issues as well as the danger of the U.S. producers getting more active since they were not part of the oil supply cut. Even though the deal was largely supported by the market, there is still a very high chance of cheating within the bloc, what would prone Saudi Arabia to "pull the plug" on the deal. On the other hand, if the prices grow above $60 thanks to the production volume limit, American shale producers will quickly jump back in the game, warn the analysts. On top of that, the American energy sector will be also supported by the industry-friendly Republican administration that only encourages higher volumes of domestic production.
As we know, even the most experienced analysts cannot give any definitive promises on how markets will behave in the future. But, it never hurts to know what the current market trends are and be prepared to make your own judgments. If anything, Brexit vote and Trump's election win taught us that predictions shouldn't be blindly followed.