2017 is going to be a year of volatility and certainly primarily driven by political risks. That’s the view of Daniel Morris, senior investment strategist at BNP Paribas Investment Partners.
Looking at Europe, with all the elections ahead of us, Morris said some countries' leading parties are talking about leaving the Eurozone.
‘If those parties won power and started implementing any of those initiatives, which would be quite acceptable for investors’ sentiment,’ Morris told Citywire Asia.
Besides European political risk, the other risk that easily comes to investors' mind is the Trump presidency in the US, particularly around trade and the the stimulus package of corporate tax reforms that he has discussed.
‘Some of the numbers initially proposed were up to seven trillion dollars in tax cuts both for corporations and households, and that will be funded just by increasing more issuances in the US treasuries and the increasing issuances in debt.
‘With that actually happening, you would see a big increase in inflation, more likely in the US. And the Fed will react to that by increasing its interest rates. So at the end, it would have a negative outcome for the US.'
Key growth drivers
Regarding the major growth drivers, Morris said: ‘The market has the potential for change in the US -- whether the result turns out to be a positive or negative change is clearly one of the big questions.
‘Though that may have more of an impact on the markets rather than necessarily on economic growth, we actually don't think it will be much higher in 2017 than it was last year.’
Another growth driver that's going to be key is perhaps the outlook for commodity prices, Morris said. ‘Clearly we have had a big rally already from February 2016 and the question is how much that can go.’
Lastly, people are fairly pessimistic about Europe right now.
‘However, as the underlying economic and earnings trends are positive, when we get to these elections, it might turn out better than expected.
‘I think there is some potential for performances in Europe.’
‘For the New Year, emerging markets look quite attractive. Compared to the valuations on the equity front, emerging markets are much cheaper or appear to be less expensive than developed markets equities,’ said Morris.
'In the short term, the US dollar is probably going to be a drag, both on equities and fixed income, but the valuation is actually looking better for emerging markets.’