Last year, 2016, will be remembered for its political upsets
Namely Brexit, the rise of populism in Europe and the election of Donald Trump, but also the year that we stopped talking about deflation, yields on government bonds rose and investor spirits were reignited.
Because of this, there is a new equation for investors; one where better growth plus a bit more inflation adds up to a change in approach to fixed income and the share market.
Global outlook: Changing seasons
Growth in the world’s major developed markets – US, Japan, and Europe – is brighter as a result of rising business and consumer sentiment and a pick-up
in manufacturing activity. There is also the anticipated boost to growth from increased government spending and recognition by central banks that higher yields, not lower, is good for economic growth. While not quite as sunny as developed economies, the storm clouds over the emerging world are no longer as heavy. Brazil and Russia are emerging from deep recessions on the back of rising commodity prices and a generally more favourable political outlook.
Most importantly for Australia is the more stable outlook for the Chinese economy. The rate of economic growth in China may slow this year but fears of a collapse are no longer imminent.
US shares should continue to perform well given the potential boost to after-tax profits from changes to the corporate tax structure. Elsewhere, weaker currencies should support Japanese shares and possibly the Eurozone.