Braving fear as point of inflection looms

As the year draws to an end, performance will be reviewed, selections will be put forward and allocation decisions will be made, as investors target the best investment positions heading into 2017.

Volatility has been rife over the past two years. The oil supply glut in late 2014 and last year’s Bataclan terrorist attacks in Paris in late November, were factors affecting investor sentiment heading into the New Year with caution at a high amongst investors and are expected to remain so in the coming year.

Unfortunately, recent geopolitical events this week have done enough to rock the Turkish lira and a number of emerging market currencies, albeit modestly. The assassination of the Russian ambassador to Turkey, the lorry attack in Berlin as well as the shootings on an Islamic centre in Switzerland have left investors on high alert even though market movements remained relatively stable.

Vladimir Putin was quick to reassure the public that Russia-Turkey ties would not be strained following the ambassador’s assassination, as the fragile relationship between both nations remains on the mend following the downing of a Russian jet over Turkish airspace in late 2015.

Added geopolitical tensions in 2017, besides contributing negatively to the world economy, would come at the unfavourable time where the 30 year bull market in bonds potentially seems to be coming to an inflection point, where tighter monetary policy measures on both sides of the Atlantic could do enough to negatively impact global fixed income, predominantly longer duration investment grade issues as borrowing costs increase.

China also plans to apply tighter monetary policy measures of its own in the coming year, as the country aims to avoid excessive asset price bubbles, namely in the property market. China, the world’s second largest economy is expected to slow further in 2017 in terms of GDP growth.

The US economy is forecasted to grow under Trump’s proposed fiscal policy measures and further rate hikes by the Federal Reserve (three expected in 2017) should contain inflation, boost the US dollar all in the hope economic data, notably out of the labour market, remains supportive and accommodative to justify such hikes.

Whilst terrorist attacks are unpredictable, the effects they have on markets have over the past few years, seen short term panic movements, only for markets to recover initial losses within a short period of time. The same has applied to political events such as the Brexit vote outcome, Donald Trump’s election and the constitutional reform vote rejection in Italy. On all three occasions markets were quick to recover initial sell-offs only for market confidence to subsequently gain momentum.

Such investor behavior points to a more risk-on approach where risky assets such as equities and selective high yield fixed income securities could be the winners over the next couple of quarters at the detriment of the majority of investment grade fixed income credit, whose yields are expected to readjust higher as hawkish monetary policy measures continue to be enforced over time.

The New Year has in store a number of European elections, Brexit negotiations and Trump’s inauguration, hence enjoy the profits of the current year, have a Merry Christmas and refocus on the themes that best meet your risk-return objectives in 2017.