The cycle lives on: What we might expect in 2017

graph2-8792017 is shaping up to be a year where we need to keep ‘market noise’ in perspective and focus on the longer term performance of our investment portfolios. Many economic commentators are predicting that markets will be volatile in 2017. However, volatility - that’s where the value of your investments rises and also falls - is something that occurs throughout an economic cycle and is not something we should be unduly alarmed about.

The recent Davos Summit in Switzerland concluded that the level of financial market unpredictability has increased, global populism is growing, interest rates are rising and a number of elections are looming. All of these factors will create a degree of market unease that will inevitably result in price fluctuations – both up and down. It is too difficult to predict how big these fluctuations will be and exactly when they will occur, but one thing we can be sure of is that they will occur. Regardless of whether the Davos conclusions end up to be correct or not, it is important to remember that these are all relatively short- term events and over time the investment cycle lives on.

The Davos summit concluded that financial market unpredictability has increased due to:

Trumpism: It is amazing how one person can polarise so many millions around the world. Regardless of whether you love or hate Donald Trump, he is certainly shaking things up. Right now, he is making heaps of promises and acting in a very unconventional style for a US president. If he is successful, he will change the US political landscape for many years to come and certainly put America First - but at what cost? However, if he is unsuccessful in getting his political promises turned into reality, and if the cost of those promises is US pain for decades to come, then he could go down in history as the least successful US president. The markets will react to his messages according to whether these messages are good or bad for business.

Rising global populism: According to Reuters, ‘The global economy is in better shape than it has been in years. Stock markets are booming, oil prices are on the rise again and the risks of a rapid economic slowdown in China, a major source of concern a year ago, have eased.’

“However, the state of global politics is worse than it’s been in a long time” said Ian Goldin - an expert at Oxford University on globalisation and development. The culprit is the rise of global populism. This is where purported vast chunks of the population have lost trust in institutions and believe that free-market capitalism needs to be overhauled. Politicians in opposition parties play to this rising populism and make ever more outrageous promises in an effort to convince their electorates that throwing the baby out with the bathwater is the solution to their woes. Donald Trump is the personification of this approach.

Elections looming: Elections are looming in New Zealand, Netherlands, France, Germany and possibly Italy this year. It is likely that populist sentiments will dominate during these events and the elections could become more confrontational and unsettling for the economy of each country. We only have to look at New Zealand to see that the opposition parties will make all sorts of claims and promises to unseat the incumbent government. It is likely to be a bitter fought campaign. The economic markets like certainty and when elections are bitterly contested and a known, status quo government is being potentially replaced by something totally unknown and unpredictable, then the markets react negatively and this potentially causes share prices to fall.

Interest rates have turned: Interest rates in New Zealand and around the world have turned and started to rise. In many instances, this will lead to falling bond values and potentially negative returns from fixed interest funds. Term deposits in New Zealand will become more popular but interest rates on these are not predicted to rise much in 2017.

All this sounds like doom and gloom but the good news is that a diversified investment portfolio weathers the storm. A good portfolio may take some short-term hits due to the factors described above, but over time, diversification using quality assets wins the day and prices recover. The key is to be in the market to take advantage of any recovery as and when it comes.

Contact your Milestone adviser is you have any queries.