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January 3, 2017

Pegler’s market report – 03.01.17: Year-end Review 2016 – Brexit, Trump and the rise of ‘Populism’


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As published in the Brighton Argus (03.01.17) Business on page 23 under the title Pegler’s Market Report:

Pegler's Market Report

Year-end Review 2016 – Brexit, Trump and the rise of ‘Populism’

As we begin 2017, we take this opportunity to reflect on what has been a tumultuous and, at times, highly unnerving period. Over the last year we have lurched between states of despair and relief and despite a much-improved growth and inflation outlook, we find ourselves considering a broad range of outcomes and risks for the months ahead.

2016 will be remembered for political upsets, the election of Trump and the vote for Brexit clearly indicating the failings of mainstream politics for many in the US and here in the UK. Having said that, for investors, 2016 will most likely also go down as the year when global deflation fears came to an end, interest rates started to rise and central banks ceased to be the primary driver of economic growth and markets.

Since the financial crisis, growth has consistently fallen short of expectations, particularly in the developed world. As the governor of the Bank of England has recently pointed out, median earnings for UK workers are no higher in real terms than they were in 2006. With average growth over the last 7 years well below trend, this has been the slowest pace of expansion since World War II.

The low growth, low interest rate environment that has persisted for a number of years has resulted in extended valuations for higher quality parts of the market. As we journey through 2017, potential upside for growth and inflation are probably higher than they have been for quite some time. Generally, this is positive for equities relative to bonds, and indeed cyclical assets over more defensive ones.

This view is perhaps tempered by the medium-term risks to the global economy and financial markets, which seem both higher and broader than they were before. Political and policy risks are likely to dominate again in the year ahead, with Brexit negotiations due to start and key European elections in Germany, France, the Netherlands and the Czech Republic, amid a rise in populism around the world.

The real economy is still likely to be the dominant factor. Reflationary dynamics in the US, a more resilient recovery for the UK and Eurozone and a much-improved picture in the Emerging World, all lead to a slightly more positive stance.

Investors should however be wary of a sharp repricing of interest rate expectations, predominantly in the US and a dramatic or further rise in the dollar.  We must hope that political uncertainty throughout the Eurozone, does not derail recovery expectations and worse still drives a crisis of confidence, financial and political instability or a breakup of the Eurozone.

The UK recovery may well be slowed during 2017, but markets still hope for some kind of negotiation of Brexit terms that is likely to be beneficial to investors.

By David Pegler, Brighton Capital Management

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