As 2016 draws to a close, and this quite possibly our last blog for the year, our attention turns to the year ahead. For the first time in what seems like an eternity, the fear of equities feels as if it has almost been abolished. The Vix index, or as many views it, as the gauge of fear or greed within equity markets, is trading at a 2-year low. Merrill Lynch reported that their clients continue to buy US equities, for the sixth straight week.
Backing the unexpected has been a winning trade, for not only last year, but the previous few years. What will 2017 bring? We will explore this subject further in our outlook for the coming year, released in the coming days, however we can lay the ground work today.
The recovery in stocks since the recession of 2007, is beyond many peoples expectations. For example, the recent rises alone in equities has added another $2.5 trillion to global market capitalization. Market commentators are now debating if the much vaunted and anticipated bond to equity rotation is finally commencing.
Assuming everything pans out as market commentators anticipate, which is a tall ask, equities should benefit from a tenth year of rises. Company earnings are expected to pick up, monetary policy remain accommodative and global growth improving. What are the unexpected events that could derail this theory, it could well be nothing to do with European elections or the recent rise in so called “populism”.
The reflation trade is the new buzz strategy, inflation is back, or will be soon. Some are even talking about the return of hyperinflation. How quickly sentiment changes, a year ago, inflation was consigned to the history books, now it’s coming back with a vengeance, apparently.
The rise in the stock market has created wealth, for those lucky enough to be invested in it. However more people have an exposure than they realise, for example pensions or company share schemes. What happens if savers start to realise those gains? For inflation to occur they need to spend the capital gain. Central banker policy tries to discourage saving as this increases deflationary pressures.
Should investors decide to hoard those gains, believing the risk of spending is too high, uncertain how the capital can be replaced, and prepared to accept the lack of income for the security, this could undermine this view. Many savers have kept money away from banks, uncertain of their capital strength. As confidence returns to banks, despite the best efforts of the central banks the deflationary pressures could return. Could be this be outside bet?
We wish all our readers aMerry Christmas and a prosperous 2017.