Shanti Kelemen, Portfolio Manager, Coutts reviews this week’s strong economic data, but notes there is lots of uncertainty ahead in 2017.
Our key messages this week are:
It was an eventful end to the year, with major equity indices hitting record highs and the Federal Reserve adopting a hawkish tone by forecasting three rates rises in the coming year.
But most of 2016 was littered with surprises. The biggest shocks were Donald Trump winning the race to the White House and the UK voting to leave the EU. The markets were fairly volatile as a result but, against expectations, risk assets climbed following robust economic data and upbeat sentiment on reflationary plans from the US President-elect.
It is too early to say what sort of year awaits investors, but we expect more uncertainty, including the ultimate shape of the UK’s negotiation strategy for exiting the EU and Trump’s plans for the US economy.
One week gone, indications strong
Based on just one week’s data, early indications are quite positive: strong consumer confidence numbers out of the US and compelling PMIs from the UK and Europe point to better fundamentals for the global economy. In this regard, we have maintained our preference for so-called risk assets like equities over low-yielding ‘safer’ investments such as government bonds.
Rising rates present short-dated opportunities
As we expect interest rates to increase gradually in the US, and inflation to pick up globally, we have a preference within fixed income for short-dated bonds, which are less sensitive to rising interest rates. Two of our seven investment themes for 2017 are high-yield (lower-quality) corporate bonds and debt issued by financial companies. The former are less sensitive to rate rises because of their higher yields and financial companies should benefit from rising rates, as this tends to increase their lending margins and profitability.
Supported by sound investment principles, performance has been consistently strong in the last 12 months, though past performance is not a guide to future returns.
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
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