In short, while investor confidence in the Trump administration's pro-growth philosophy remains high, doubts are beginning to emerge about its implementation. Investors are beginning to ask how potentially conflicting priorities can be resolved. Those concerns are only likely to be assuaged when specific, growth-friendly legislation in areas such as taxation, deregulation and infrastructure spending makes headway in Congress. And that typically requires presidential leadership.
Our view is that market trends that began to emerge in the second-half of 2016 are likely to persist, albeit more gradually. U.S. and global growth continue to improve. Inflation appears to have bottomed in the U.S. , Japan and much of Europe, but is only likely to rise at a gradual pace. China continues to grow steadily, even if its imbalances remain unaddressed. Recessions are giving way to better growth prospects in Russia and Brazil.
Improving economic fundamentals will continue to push global bond yields and equity valuations higher, continuing market trends of the past half year. Within fixed income allocations, duration exposure is likely to be trimmed, while value and cyclical stocks should outperform defensives and dividend plays.
Various shocks are imaginable, but the focus in 2017 is likely to be on politics. Will populism in the U.S. and the U.K. be transmitted to Europe via elections in the Netherlands, France or Germany? More importantly, will this lead to policies that unnerve consumers and business, leading to renewed economic weakness?
In 1933, Roosevelt's first 100 days defined his presidency. His aim, to paraphrase, was to use the levers of government to fight the fear of fear itself. Will the first 100 days of the Trump administration similarly lay the foundations for stronger growth by focusing on reform, lower taxes and infrastructure investment? Or, instead, will Trump's policies lead to trade and international frictions, resulting in greater economic uncertainty and less growth?
Roosevelt's first 100 days helped ensure that the Great Depression would not undermine the political fabric in the U.S. , as it did elsewhere. Today, matters look different. Global growth is resilient, but it is not shock-proof. The key question for 2017, therefore, is whether populist politics will derail the global expansion.
Or, to put it another way, will politics trump economics?
Larry Hatheway is Chief Economist and Head of GAM Investment Solutions.
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