Investment analysts agree that uncertainty and volatility will continue to characterise the world’s financial markets this year, but they seem to be cautiously optimistic about the global economy, in the short to medium term at least.
Economist Sanisha Packirisamy, and Herman van Papendorp, the head of asset allocation at Momentum, say the global economy appears to have shrugged off the shocks of Brexit and Donald Trump’s election victory in the United States, but it is “hardly in peak condition”.
“While less austere budgets could temporarily boost growth, an increase in debt risks narrowing growth prospects in the future,” they say. “We expect a modest growth trajectory in developed economies over the medium term, with the United Kingdom and Japan remaining the laggards, while improving fundamentals and continued policy support should underpin relatively firmer economic activity in the US and the Eurozone respectively.”
However, the expected recovery is not without risks, given the wide range of possible economic outcomes in a politically fraught environment, Packirisamy and Van Papendorp say.
Peter Langerman, the chief executive of the Franklin Mutual Series at international asset manager FranklinTempleton, shares this cautiously optimistic view. “By a number of measures, global financial markets and economies appear to be approaching 2017 in a better position than at the start of 2016: global economic growth, while still modest, showed signs of improvement in the second half of 2016; labour markets in developed economies have gradually tightened; corporate earnings in the US have stabilised; and crude-oil fundamentals have started on a slow path to rebalancing,” he says.
However, Langerman says, Brexit, Trump’s victory, and uncertainty over the path of interest-rate hikes by the US Federal Reserve “are among a collection of factors with the potential to produce short-term volatility and longer-term impacts on sector and company fundamentals”.
In its investor-outlook publication for 2017, international financial services company State Street says Trump’s protectionist stance on trade and his desire to repatriate company profits to the US are likely to be negative for emerging markets such as South Africa, because of implied dollar strength and lower reliance on exports from these countries.
On the other hand, State Street says, a widening of the US budget deficit could weaken the dollar, and “political realities may serve to keep protectionist tendencies in check”.
Here at home, South Africa faces a ratings downgrade to junk status if the political and economic situation does not improve. However, Packirisamy and Van Papendorp say that, unlike the downward spiral triggered in Brazil following a ratings downgrade to junk, “we expect a downgrade to induce an appropriate response from the South African authorities. The government is likely to adhere to fiscal consolidation and trigger vital structural reforms in order to reverse a potential sub-investment grade rating.”