IF 2016 taught us one thing, it's that making predictions is a precarious occupation, fraught with potential upsets. The obvious shocks – Brexit and the US Presidential election - have resulted in many miles of column inches and analysis. As we stand now, they are both likely to cause continued reverberations around the global market over coming months.
Brexit is, of course, the main focus for UK investors and while the speculation as to a 'soft' or 'hard' option persists, it is just that – speculation, which is likely to continue and it is likely to be a long time until March.
The most obvious impact on markets has been the fall in sterling, which is down by about 17 per cent against the dollar since June, with the dollar earners being winners.
We started last year with two obviously cheap sectors - miners and banks. We've seen a massive rise in the mining sector over the year, whereas banks have not fared as well.
But 2017 opens without such a clear disparity in valuation between sectors. It goes without saying that the most significant individual factor will be Brexit, but there are a number of other more general factors such as interest rates and inflation which could have a significant impact on the equity market.
Interest rates are without doubt on an upward trajectory in the US, with the Federal Reserve having indicated that there may be three more interest rate rises in the coming year. Fears of inflation have also reared their head, according to a recent survey 84 per cent of fund managers are expecting a rise in global inflation, with the US and UK being cited as economies most likely to experience inflation this year.
This will have a mixed impact on the equity market, with some companies being flattered by a pick-up in inflation and others having to deal with more expensive input costs. However, it is important to remember that forecasting inflation is a notoriously difficult exercise and one that is rarely accurate.
The wider European Union is also likely to attract a great deal of attention in 2017 as we face elections in France, Germany and the Netherlands. After the unexpected outcomes last year, there is scope for upsets and this in turn may have wider ramifications for the EU as a whole. This has already been reflected to an extent in the valuation of equities, but it is very difficult to price in such uncertainties.
Emerging markets rallied last year, but the election of Donald Trump did have a negative impact. The strong dollar is a tough headwind as many emerging markets have dollar denominated debt and with more interest rate rises forecast, servicing their debt will become more expensive.
As things stand at the moment the FTSE 100 is at its highest level, a fact which is somewhat puzzling given the magnitude of uncertainties that lie ahead.
Investors are likely to face a bumpy ride over the coming months, but after last year’s experience, it is impossible to predict the outcome.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
