by Alexander Beard, on Dec 13, 2016 2:32:48 PM

These notes were written on Monday 12th December, and all the information is accurate at that date: where quoted, stock market figures are as at 30th November.

2016 is a year that has seen some remarkable developments, but surely on 12th December we are now safe to look back over the year: nothing else can happen in the last two weeks of the year. Can it…?

Looking Back

In the hope that it can’t, let’s take a look back at 2016, starting in the UK with some chap named Cameron (if the name rings a bell it may be because his wife has just launched a fashion label…).

In February, David Cameron returned from Brussels with his ‘deal’ on the UK’s continuing membership of the EU. ‘Remain’ was well ahead in the polls at that point with the June Referendum appearing little more than a formality. After the victory, Mr. Cameron would no doubt stay PM for a reasonable period, before retiring to write his memoirs and handing over to Chancellor George Osborne.

‘The best laid schemes o’ mice an’ men…’ as Robert Burns wrote in 1785. David Cameron’s plans went ‘aft agley’ in a big way, with a majority of 1.3m voting for Leave. Theresa May swept in to Downing Street and George Osborne was swiftly swept out, to be replaced by the ultimate ‘safe pair of hands,’ Philip ‘Spreadsheet Phil’ Hammond. At the time of writing, the new Prime Minister has declared her intention to trigger Article 50 and begin the formal process of leaving the EU by the end of March next year and – despite sundry distractions in the courts – remains adamant that “Brexit means Brexit.”

What of Europe? How will it cope without the UK? Well, whatever happens, the German economy will go on producing a trade surplus each month. The latest figure is €19.3bn and it has consistently been between €20bn and €24bn throughout the year. Would that the rest of Europe were so fortunate (or hard-working…). Youth unemployment continues at ridiculously high levels in many countries and the IMF has openly spoken of Italy having ‘two wasted decades.’ And as we’ll see below, Europe will be at the centre of the world’s attention next year…

…as will Donald John Trump who, on January 20th 2017, will be sworn in as the 45th President of the United States. This time last year, a Trump Presidency was deemed even less likely than Brexit, but 2016 will not go down as a good year for pundits and pollsters. Trump is currently putting together his cabinet, with suggestions that Exxon oil man Rex Tillerson will be handed the key role of Secretary of State. Trump also gives every indication that he will pursue a pro-business agenda and the Dow Jones index has climbed to record levels since his victory in November.

He has also made hints that the US will reverse its previous ‘one China’ policy, and has spoken to Tsai Ing-wen, the leader of Taiwan. Predictably, this has not been well received in Beijing, with the Chinese leadership already unimpressed by Trump’s comments during the campaign about their economic policies.

Despite India overtaking it as the world’s fastest-growing major economy, China remains the engine of economic growth – not just in the Far East but in the global economy. There have been concerns all year about a ‘hard landing’ in China – seen by most experts as a bigger threat to the world economy than either a Trump Presidency or Brexit. Official figures for the end of the year will see the Chinese economy having met – or very nearly met – its official target of 6.7%. There are plenty of apocryphal stories saying that growth isn’t at that level, but the Chinese economy continues to consistently generate a huge trade surplus of between $40bn and $50bn every month.

World Stock Markets in 2016

Looking back to 2015, Russia was the best performing of the world’s major stock market, with a gain of 26%. Germany was up 10% - no doubt helped by that relentless trade surplus – while the wooden spoon went to Brazil, where the market fell by 13%. The UK also had a disappointing year in 2015, falling by 5%.

This year, the Russian market has continued to make significant progress and by the end of November was up a further 20%. But the real star performer has been Brazil: this is a country that has staggered from economic crisis to economic crisis, impeached its President and seen its state oil producer lose billions every quarter. All hopes, though, are pinned on new President Michel Temer, and the Brazilian stock market was up 43% for the year as a whole at November 30th. The US market is up by 10% for the year to November 30th – as above, boosted by the President-Elect’s pro-business agenda – and the UK market is up by 9%.

The major markets to have fallen significantly this year are China, down 8% at the end of November, and Japan, which was down by 4% at the end of November.

We began the year with the oil price hovering around the $30/barrel range: we are going to end it with the price around $50/barrel. Whether the mooted restrictions on the supply of oil will prove workable is open to doubt, but it doesn’t look like we’ll be heading back to $30 and cheap petrol any time soon.

Looking Forward

If you’re tempted to breathe a sigh of relief as the clock strikes midnight on December 31st and think ‘phew, we won’t see another year like that one,’ think again…

Making economic forecasts for 2017 is extremely difficult, as Chancellor Philip Hammond conceded in his first (and last) Autumn Statement. At the time, he was forecasting growth of 1.4% for 2017, rising to 1.7% in 2018. The British Chambers of Commerce are rather less optimistic, forecasting 1.1% for next year followed by 1.4% in 2018. In the US, the new President will actively pursue his policy of creating – and repatriating – american jobs, as evidenced by the deal he has already done with Japan’s SoftBank, which will apparently create 50,000 jobs. This is likely to lead to pressure on interest rates – but then there seems to have been ‘pressure on US rates’ for the whole of 2016…

Many would like to see Trump tackle the US trade deficit: as Germany and China produce a surplus every month, so the US record a loss – and a big one. The latest monthly deficit was $42bn, meaning that the country is adding another $1tn of debt every two years.

It may be that stock markets are driven by politics as much as economics in the year ahead. Traditionally, markets value one thing above all others, and that’s certainty. Somehow, I think ‘certainty’ may be in short supply in 2017…

First of all, we’ll have President Trump. It appears likely that the rhetoric of the campaign trail – and his Twitter account – will give way to the realities of office. But it also appears that we can forget about ‘the normal channels.’ Trump will undoubtedly ruffle feathers, although anyone old enough to remember Ronald Reagan will also remember the dire predictions that preceded his Presidency.

We’ll also see Brexit triggered next year, beginning a formal process which should see the UK leave the EU by March 2019. There will be plenty of twists and turns along that particular road and don’t be surprised if Theresa May calls a General Election in 2017.

However, attention next year may shift away from the UK and the US to Europe. First up will be Holland, with a General Election to elect all 150 members of the House of Representatives scheduled for March 15th. At the moment, the far-right Freedom Party lead by Geert Wilders is on course to become the largest party, comfortably leading Prime Minister Mark Ruffe’s ruling conservative-liberal coalition in the polls.

Late April sees the first round of voting in the French Presidential election, with a second round, if necessary, on May 7th. At the moment, the indications are that the final choice will be between Marine le Pen of the Front National and the likely winner, the right’s self-avowed admirer of Margaret Thatcher, Francois Fillon.

We then have elections in Germany, almost certainly in September. Current Chancellor Angela Merkel has stated her intention to run for a fourth term in office, but she will come under severe pressure from the right-wing Alternative fur Deutschland (AfD).

Geert Wilders – a man who may be as significant in 2017 as Donald Trump was in 2016 – was recently on trial for inciting discrimination. Speaking in his own defence, he said, “The wind of change and renewal blows everywhere.” That is unquestionably true: I suspect that the Europe of December 2017 – and its leading personalities – will look very different from that of December 2016.

Add in the continuing debate over the real growth of the Chinese economy, the unpredictability of its neighbour, North Korea, Vladimir Putin’s continued ascendancy in Russia and the covetous glances he regularly casts at the Baltic States and 2017 has every chance of being at least as dramatic as the year coming to a close.

All the inevitable events will impact on stock markets and currency and commodity prices: but rest assured that whatever happens, we will be here to answer your questions and keep you up to date on those events and their implications. For now, though, it simply remains to send our very best wishes for Christmas and the New Year. We will be in harness in the first week of January – when ‘change and renewal’ will most definitely be on the cards. Specifically for our waistlines…

Topics:EuropeFinancial PlanningMarket CommentaryUKUSA