Fiscal stimulus
Global growth tailwinds should continue to support risk assets, though the unpredictability of Trump’s presidency may temper investor enthusiasm. If the new administration can deliver a viable fiscal stimulus, avoiding a major trade confrontation, GDP and corporate profits could surprise on the upside, and not just in the US.
Profit rebound
Global profits are rebounding following the downturn from mid-2014 until early 2016. The drag from energy and mining sectors has reversed and increased economic activity will boost revenues. Financials are major beneficiaries of the current environment as stronger growth leads to higher incomes, confidence and loan demand.
Bond uncertainty
Demand from retail investors for index-linked gilts has pushed valuations close to historic extremes and on a break-even basis imply that RPI will average 3.5% or more over the next 10 years. As the Brexit negotiations could damage consumer confidence sufficiently to cause a ‘cliff-edge’ collapse in economic activity and inflation, the outlook for UK bond yields remains more uncertain than usual.
Change ahead
Although political distractions are likely to increase in Europe, with the UK triggering Article 50 this month, the French presidential election in May and German federal elections in September, companies have a good record of adapting to changin circumstances. A period of consolidation for equity markets would be healthy and enable earnings to catch up with valuations.
Cautious rates
The changing inflation outlook means further monetary easing is unlikely this year. High debt levels and the delayed impact of disinflationary influences suggest central banks are likely to err on the side of caution on interest rate increases, given that inflation in most economies is expected to rise towards 2% target levels.
