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Roadmap 2017

Economic outlook

Trump’s election has prompted us to adjust our growth forecasts for the US upwards. Although growth may well be lower than expected in the first half of 2017 as a result of the introduction of (limited) trade tariffs, it is likely to pick up in the second half in the wake of tax cuts. Inflation will rise further. Initially, this will be caused by base effects, but later also by new trade tariffs and an acceleration in aggregated demand. Although the governors of the US central bank (the Fed) proved to be over-optimistic about the number of interest rate hikes in 2016, we believe their forecast of three over 2017 to be more realistic. For the time being, we assume two to three interest rate increases.

We are now also more positive about the UK. We now anticipate a slowdown in growth rather than a recession. The UK economy proved to be more resilient than expected in the wake of the Brexit referendum result. Higher oil prices and the weaker GBP are likely to push inflation to above the target level in 2017. Yet the BoE will look beyond these temporary effects; its monetary policy remains expansionary.

As previously noted, it will be a busy year for the Eurozone in political terms. In spite of the political uncertainty we expect the economy to grow at about the same rate as last year. Although overcapacity will remain high in 2017, inflation will also rise here as a result of basic effects. In December 2016, against all expectations the ECB announced its intention to continue its bond-buying programmes throughout 2017. The amount spent each month is to be reduced from EUR80 to EUR60 billion, however. We expect the ECB to announce the gradual tapering to zero of the bond-buying programmes in the second half of 2017.

For Japan, we anticipate a minor acceleration in growth as a result of the budgetary stimulation package announced back in October 2016, most of which will be spent in 2017/2018. Inflation will also pick up. The structural tightness on the job market (caused by demographic factors) will lead to wage inflation. The weaker JPY and higher oil prices will also contribute to this. The Japanese central bank’s (BoJ) policy will continue to depend greatly on inflationary trends in 2017. For the time being, we assume that the BoJ will maintain Japanese 10-year government bond yields at about 0%. This policy will be put to the test, however. We cannot rule out the yield target gradually being increased towards the end of 2017.

The OPEC deal to cut oil production and global growth picking up mean that the fundamentals have improved for oil. We expect the price to be between 50-70 USD per barrel in 2017. Metal prices have also started to bottom out. All in all, the outlook for commodities has improved. This will contribute to the slow upturn in growth that we predict for EM in 2017. Growth is likely to slow slightly in Asia ex Japan. Monetary policy will remain accommodating in both regions.

“The improved economic outlook and the expected rise in inflation have already partly been priced in by the financial markets.”

Roadmap for 2017

The improved economic outlook and the expected rise in inflation have already partly been priced in by the financial markets. Equity prices have risen further, while bond yields are also up. As long as economic momentum remains strong and analysts do not downgrade their forecasts, we continue to be more positive about equities than bonds. Valuations are high in both asset classes, however. In equities we have a (temporary) preference for developed market equities versus emerging markets. We expect bond yields to rise further and are positioning ourselves accordingly. The improved fundamentals for oil and metals mean we are also more positive about commodities.

Kempen Capital Management N.V. (KCM) is licensed as a manager of various investment funds and to provide investment services and is subject to supervision by the Netherlands Authority for the Financial Markets. This information may not be construed as an offer and provides insufficient basis for an investment decision.

The Asset Allocation Desk

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