GAM: Key events in 2017

With so much happening in parallel across political, economic and financial landscapes, it seems daunting to try to identify the one event that shaped 2016. In the following short statements, our investment experts share their predictions on which events will prove pivotal in 2017.

Fed and ECB in the spotlight
Monetary policy will be key for financial markets in 2017, with central banks occupying centre stage. Following Donald Trump’s election victory, how will the US Federal Reserve react to his multi-trillion dollar infrastructure spending plans? Specifically, how much will Janet Yellen and her colleagues ‘accommodate’ US fiscal expansion given the high employment rate? In Europe, the ECB has already announced a slight tapering of its future asset purchases. Should growth remain resilient and if higher oil prices lift eurozone inflation, outcomes in both the US and Europe will validate the shift toward higher global bond yields. With both central banks in play, can a taper tantrum (or worse) be avoided?

Politics in Europe: make or break
2016 always had the potential to be a political game-changer. Like the Arab Spring in 2011/12, in which disenfranchised citizens rose up against their authoritarian leaders, this ‘Western Spring’ of 2016, with key elections and referenda, surprised with major political shocks: First the Brexit referendum and subsequently the US election. An inward-looking electoral majority has rebelled against the status quo ‘elitists’ and is loudly claiming enough is enough – this momentum can only continue to build. We finish this political shock year with a defeat in Italy for Prime Minister Matteo Renzi in his reform referendum, which could still herald in a change of government with a more euro-sceptic agenda, but that is to come further down the line. If we thought 2016 was as surprising as it gets, 2017 is already shaping up to trump last year, with general elections in the Netherlands, France and Germany – nearly 40% of Europe’s collective GDP is voting in 2017. The very fabric of the European dream could be quickly torn apart should any of these swing to more nationalistic parties, and the eventual death of the euro could follow closely behind.

French presidential elections
The French presidential election is the key event for us. An election of Francois Fillon to the French presidency has the potential to finally see some long-needed structural change to the economy. Despite very negative views, France is a very productive economy with a world-class educational system and significant technological innovation. What has held the French economy back for many years has been excessive regulation, bureaucracy and excessive taxation. Any move to reduce the burden of taxation, roll back the frontiers of the state and make life easier for entrepreneurs and wealth creators has the potential to ignite animal spirits and increase economic growth in Europe’s second-largest economy.
Enzo Puntillo, head of fixed income in Zurich
A victory by Marine Le Pen of the Front National, which seems to have a clear objective compared to other populist parties in Europe, could risk pulling France out of the eurozone. This would not only have a devastating impact on Europe, but could have ripple effects far beyond European borders. The euro could further accelerate its devaluation trend against the US dollar, having consequences for dollar-sensitive assets.

Trumped by uncertainty
With so many commentators making comparisons between Ronald Reagan and Donald Trump, we are concerned about a sense of complacency going into 2017. Trump has pledged to shift the emphasis of economic stimulus from monetary to fiscal, with the consensus believing that this will result in a stronger dollar, rising equity prices and firmer interest rates. Although their ‘visions’ may be similar, Reagan became president when bond yields were at all-time highs (with prices at all-time lows), while Trump’s presidency will begin with bond yields near historic lows and prices near historic highs. Consequently, while Reagan presided over the beginning of the biggest equity bull market in recent memory, amid a rapid loosening of monetary policy in late 1982, there is every chance that Trump’s first term in office will be characterised by rising interest rates. In terms of credit markets, the big concern is the potential fallout should US rates tighten significantly faster than the consensus anticipates. The problem with the popularity of passive investing is that the indices tracked are capitalisation-weighted. This means that the issuers with the most outstanding debt represent the biggest components of the indices and, with yields having come down so far, there is very little scope for certain issuers to absorb rapid rate increases.

Boost to Japan’s labour market
We are closely following the significant deregulations on the labour front in Japan in order to boost female labour participation. The government is currently working on a couple of changes: a) revisions of spousal tax deduction – women who work part-time are currently disincentivised to work more than a certain number of hours, and the government is planning to broaden the tax credit. This change is expected to be approved by the Diet in March 2017; b) tax credit for hiring au-pairs – to encourage working mothers to hire au-pairs during overtime work; and c) loosening rules on foreign au-pairs or immigrants – foreign au-pairs are already allowed in some ‘special economic zones’ in Japan, and the idea is to extend this deregulation to a broader scale, which will help to tackle demographic issues in Japan.

Iran sanctions and the oil price
Iran has sharply grown its oil production after the sanctions were lifted in January 2016. The US-led nuclear deal was signed by President Barack Obama without the approval of the Republican congress and has been sharply criticised by Donald Trump. A majority of Republicans wants Iran sanctions to be re-imposed or at least the nuclear deal to be renegotiated. Such a development could significantly impact Iranian oil output in an already tightening market and lead to higher oil prices.

Turnaround in Swiss luxury watch fortunes?
With Swiss watch exports declining, investors have been waiting for this segment to bottom out. Hence, the annual watch fairs in Geneva and Basel, which are also the largest of their kind in the world, will be crucial in the first quarter of 2017 to take the industry’s temperature: Is sentiment improving for the watch makers after two challenging years and are we going to see the innovations that consumers will be happy to fork out their hard-earned cash for? Directly related to that is the Chinese New Year, which is a bellwether for how loose the Chinese consumers’ purse strings are: Specifically, is the solid consumer sentiment in China continuing and what are the Chinese buying?

Obamacare
All eyes will be on Donald Trump’s healthcare agenda as new president of the United States. Specifically, will he follow through with his campaign promise to repeal Obamacare? There are some uncertainties as to how the mechanism of repealing and replacing health insurance coverage for about 20 million people is going to pan out. But Tom Price, the prospective Health and Human Services Secretary, has a plan: His “Empowering Patients First Act” will take insurance coverage in a fundamentally different direction, away from mandated coverage and care and toward a free-market approach. While it is difficult at this stage to identify clear winners and losers, we don’t expect these reforms to threaten the lifeblood of the industry: the venture capital that feeds the innovation and product cycle.