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The Big Investment Questions for 2017

The big investment questions for 2017 - Sydney Morning Herald
The Sydney Morning Herald

After a year of drama and upsets, investors shouldn't be expecting a more sedate pace in 2017. Here are some of the big questions hanging over the market as we start the new year.
Will it be a good year for the ASX?

It's the $1.6 trillion question, and equity strategists at the big investment houses have been earning their oversized pay packets trying to do the impossible and predict where the sharemarket will end 2017. Not that their forecasts for 2016 did that badly.

In late 2015, the median forecast from a survey of 10 brokers had the S&P/ASX 200 index ending 2016 at 5550 points, not that far below the 5666 points we got on Friday's close.

Looking ahead, and the median strategist predicts the ASX 200 will end the year at 5800 points, implying a capital gain of only 2.4 per cent. Add in the market's expected net dividend yield of 4.5 per cent, on Bloomberg numbers, and an investor in the benchmark measure could be expected to earn you close to 7 per cent, before fees and taxes.

After knocking it out of the park in 2016 – the ASX's mining sector surged close to 40 per cent – investors are wondering how much further this trend has to go. There are reasons to be optimistic, even for those who missed out on the massive gains of the past 12 months or so.

"It's late, but the party isn't over," reckon Goldman Sachs analysts, who were themselves late to the party and only upgraded their view on miners to "overweight" in early December.

"While we believe the iron ore price will fall over the next few years, the demand picture appears to be continuing to improve and given the gap between current spot prices and the (rising) consensus expectations we expect the mining sector will continue to enjoy earnings upgrades over the next six months," they write.

Morgan Stanley strategists, who had more luck calling the resources revival in 2016, also reckon the sector's outperformance can be extended.

They say that the ramp up in commodity prices continues to feed through to earnings upgrades and solid share price momentum, "which have historically been too important to ignore".

Will Australia fall into recession?

In 2016 Australia's economy racked up 25 years without two consecutive quarters of negative growth – the technical definition of a recession. Can it keep this incredible run going?

Bank of America-Merrill Lynch interest rate strategist Tony Morriss is optimistic. He reckons this will be the year that we surpass the Netherlands' modern-day record of 103 consecutive quarters without a recession.

But that's not to say it will all be plain sailing. For one, the economy actually shrank over the three months to September. Economists expect it to bounce back over the December quarter, but high underemployment, weak wage growth, and heavy household debt burdens should depress consumer spending.

Meanwhile, most analysts expect the housing boom that has carried the economy over the past couple of years to wane through 2017 and into 2018. A muddle-through scenario for the economy would see the RBA keeping interest rates on hold, although some still see room for lower rates. Much depends on the continued health of our major trading partner, China.

Will China stumble badly?

Not yet, is the consensus. In late 2015, President Xi Jinping proposed that annual GDP growth should be no less than 6.5 per cent over the five years to 2020. China experts appear confident that Chinese policymakers can achieve their goals in 2017, after proving their commitment with another gush of government stimulus in 2016. Perhaps even too confident, Citi head of emerging markets economics David Lubin says.

Lubin points to "a very entrenched consensus that China will be fine in 2017". He believes this equanimity could be challenged in 2017 as a formerly "benign" US Federal Reserve begins lifting rates, making China's management of its currency and capital account more challenging. Lubin also notes that a year of government stimulus has increased imbalances within the economy, such as in the property market.

"We expect Beijing to kick the proverbial can down the road in 2017, focusing more on growth than reforms in a politically sensitive year," Nomura economists wrote, referring to the ruling Communist Party's national congress late this year.

"We expect China's reported GDP to continue to grow by 6.5 per cent in 2017, underpinned by large fiscal stimulus."

But the Nomura economists also cautioned against complacency.

"Underneath this facade of remarkably stable growth is an economy addicted to credit. We believe the consensus is too sanguine over the risk of Beijing losing its grip on the economy."

What will Donald Trump do in 2017?

Perhaps the biggest question from a global perspective is what policies the US President-elect will pursue following his inauguration on January 20. He could quite possibly label China a "currency manipulator" on his first day in power, as he has promised to do, despite the fact that the Chinese are intervening not in order to weaken their currency but to keep it from dropping further than it already has.

Talk of punitive tariffs on Chinese imports at this point seems to be just that – talk. And certainly that is how the market has taken it.

In fact, investors appear to have discounted the worst implications of Trump's campaign policies – trade wars and a mass eviction of illegal immigrants, for example – and instead focused on stimulatory promises such as massive infrastructure spending and hefty tax cuts.

Nobody really knows how Trump will act once in the White House, but many investors seem to have pinned their hopes on him. The deflating of these hopes may prove to be the guiding force for markets this year.

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