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In this week’s film, Sven Balzer, Senior Investment Strategist, reviews a year of the unexpected and how central bank announcements added some intrigue to what was otherwise a predictable week.

Looking back at 2016 - the year of unexpected

It has been a year of the unexpected, with the election of Donald Trump to the White House and the UK vote to leave the European Union having the most notable impact on financial markets.  

We witnessed global interest rates hitting record lows and, at one point in the year, the global stock of negatively yielding bonds surging to $13tn.

Central banks continued their bond purchasing programmes, though visible limits to these ‘quantitative easing’ measures meant a shift to fiscal stimulus more recently.   

Economic activity picked up in the second half of the year after a shaky start, and inflation expectations rose as a consequence.

The surprise US presidential election victory of Donald Trump, an advocate of fiscal expansion, helped reshape the markets during the final months of the year. There was a large scale selling of bonds and rotation into major equity markets. This investment trend has helped support our preference for equities over bonds within our portfolios.


Market update for the week - tales of the expected

While the US Federal Reserve’s (Fed’s) quarter point increase in interest rates to 0.75% was widely expected,  the Fed’s increased rate-hike projections for 2017 (from two to three)  surprised investors. The markets interpreted this as a slightly more hawkish bias, with interest-rate sensitive bonds and gold falling and the dollar rising accordingly.

The Bank of England meanwhile left rates on hold at 0.25% and said its bond purchases would continue as expected. Both the Fed and Bank of England’s announcements were in line with our expectations. Our views of the markets, and how we invest in our portfolios remain unaltered. –We maintain a preference for equities over bonds, especially lower-yielding government debt, as shares could benefit from reflationary US fiscal policies.


What lies ahead for 2017?

We believe global economic activity will continue to rebound, though political events are likely to influence market moves in the year ahead. These include a busy schedule of elections across Europe, and the UK triggering Article 50 to start negotiations for leaving the EU.

We believe fiscal stimulus and rising inflation expectations are likely to be a focus for investors, while the ‘hunt for yield’ may fade as a major investment theme in the next 12 months. As well as having a continued preference for equities over bonds, within fixed income we still prefer the better yields and lower interest-rate sensitivity of corporate over government debt for 2017.

Sven Balzer

Sven Balzer

Senior Investment Strategist

Sven joined Coutts in 2013 and works in the investment strategy team with a focus on asset allocation and investment themes in particular.

Sven has extensive experience in wealth management and capital markets. Prior to Coutts he was the head of Structured Products and Derivatives of Barclays Wealth EMEA. He also worked at UBS Wealth in London and Societe Generale in Paris and Singapore.


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