Market Outlook Report – January 2017

Overview of 2016


The UK ended 2016 on a high after official figures provided no evidence of a Brexit slowdown. The economy grew more strongly than expected in the three months to September. Figures from the Office for National Statistics showed that GDP expanded by 0.6 per cent in the third quarter. That was an upgrade from its earlier estimate of 0.5 per cent.

growth rate by quarter

GDP growth in the UK held firm at 0.6% in third quarter of 2016, defying predictions of a massive slump

The UK also ended last year as the strongest of the world’s advanced economies.

GDP grew by 2.1% in the year and service sector business activity rose to a 17-month high. Activity in manufacturing jumped to 56.1 last month according to the purchasing managers’ index. That's up from 53.6 in November and is the highest rate in 2½ years. The weakness of sterling undoubtedly helped provide a boost. In construction, house building drove the purchasing managers’ index rose to 54.2 in December compared to 52.8 a month earlier.

chart of manufacturing pmi

Manufacturing PMI rose to its highest level in 2 years in December 2016

Household borrowing grew at the fastest annual rate for more than 11 years to reach a total of £192.2bn in November.

chart of consumer debt

In December 2016 consumer debt increased at it's fastest pace since 2005

Performance was wildly different to the forecasts provided pre-Brexit​

The figures once again make a mockery of warnings that the UK would plunge into recession in the immediate aftermath of a Leave vote. Consumer spending was particularly buoyant and retail sales grew strongly in October and November. However, some say a drop in footfall at the Boxing Day sales could be a sign of things to come.

brexit vote

The UK's performance post-Brexit has been much better than many forecasts predicted

The Bank of England cut interest rates to a record low of 0.25% in August. It is likely to keep rates on hold for the whole of 2017 as it strives to balance rising inflation with weakening growth.

Inflation climbed to its highest rate in more than two years in November and is expected to rise above the Bank of England’s 2% target during 2017. Combined with sluggish wage growth, that will leave consumers with less cash to spend.

At the same time, the start of the formal process of leaving the EU could increase uncertainty for businesses. IHS Global Insight expects growth to slow to 1.4% this year, down from 2.0% in 2016.

Equities surged forward

There is a saying in financial markets: “As goes January, so goes the rest of the year.” Nothing could have been farther from the truth in 2016. A rough start to the year ended with stock markets soaring to record highs.

Globally, it was a turbulent year for the stock markets. The UK’s vote for Brexit and the US election of Donald Trump brought unexpected challenges and uncertainties for investors.

However, the FTSE 100 ended the year on a high. A traditional Santa Rally sent the blue chip index up to end the year at a record high of 7,142.83. This came after a remarkable turnaround across global equity markets this year. The FTSE 100 enjoyed its best month since July 2013 in December. It rose by 5.3 per cent and finished the year 14.4 per cent higher than at it started. That strong performance outpaced other leading indices.

ftse100 chart for 2016

A traditional Santa Rally sent the blue chip index up to end the year at a record high of 7,142.83

The UK has performed particularly well​

In fact, the UK’s leading share index was the best performer among Europe’s major bourses in 2016. The FTSE 100 turned in its best annual performance since 2009 when world economies were emerging from the financial crisis.

In particular, UK equity markets were boosted by the exposure of international companies to the stronger dollar. A big slice of the FTSE’s 14.4% gain in 2016 was down to the exposure of international companies to the stronger dollar. The weakness of sterling also magnified the overseas earnings of the multinationals that dominate the FTSE 100.

The UK stock market performed much better than other major bourses in 2016

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Overall, you would have lose out in a big way in 2016 if you did not have money riding on the world’s stock markets. Shares in the UK and US hit all-time highs and UK investors were also able to make strong returns by investing in Europe, Japan and emerging markets. Our model portfolios have been well positioned to share in the strong performance of the global stock markets through our diversified selection of investment funds.​

​Prospects for 2017

Britain’s leading stock market index has powered ahead on the back of the cheap pound and Donald Trump’s forthcoming presidency. The FTSE 100 has already broken a host of records since the start of the year and reached record highs. January saw the longest sequence of gains on consecutive trading days since the index was launched 33 years ago in 1984. The FTSE 100 index has already passed the average City forecast for the end of 2017. That was just 7.065. But the index's longest winning run has also been notable for the relatively modest daily gains.

The FTSE 250 (the second-tier index) has also reached record highs. The mid-cap index has a greater exposure to the UK economy but, like the FTSE 100, has been lifted by the sharp recovery in the mining sector.

Of course, no rally can continue indefinitely. In the absence of any unexpected market shock, profit-taking, calm reflection and strategic consolidation will inevitably cause the stock market to pause for breath.

Equities may now be overpriced​

Some statistical analysts propose that shares in London are at their most overvalued since 2012. They suggest that uncertainty about political upheaval and the global economy will cause the market to head for a big sell-off.

The CFA Institute is a global association of fund managers and analysts which carries out a regular survey of fund manager sentiment. Their latest results revealed that 71 per cent of participants believed that equities in developed markets, including the UK, were overvalued. That compares with just 40 per cent believing the same thing at the beginning of the year. The last time so many managers felt that equities are too expensive was when the survey began in January 2013.

More fund managers believe UK equities to be overpriced than at any time since January 2013

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Other analysts are more circumspect. They highlight that the FTSE 100’s rise is merely a reflection of the fact that many of its export-orientated companies have been helped by a weaker sterling.

Oil and Mining Sectors are expected to drive increases​

The recent good performance of the oil and mining sectors is seen by some as a positive pointer for 2017.

These two sectors, along with banks and insurers, make up 45 per cent of the FTSE by market cap. They are forecast to provide 76 per cent of the expected increase in pre-tax profits and 52 per cent of the projected increase in dividends in 2017.

On balance, the long-term outlook for shares remains positive. The yield on the FTSE is still about 3.5 per cent, which compares well with yields on bonds or savings accounts. Meanwhile, a steady, slow and uneven global recovery should support international trade and therefore company profits. The current bull market is underpinned by low interest rates, which look set to stay. That and the fact that investors are in quite a sober mood.

Market Issues which are very likely to prevail in 2017

In the absence of a proven and reliable fortune teller, we could simply retreat to the cliché that you should always expect the unexpected. However, we can at least identify some market issues which are very likely to prevail in 2017.

A shift to fiscal stimulus​

With interest rates at all-time lows, central banks are running out of options when it comes to boosting growth through monetary policy. The emphasis is therefore set to shift to fiscal stimulus. Europe and the UK are easing back on austerity whilst Canada and Japan are introducing stimulus packages. President Trump is proposing tax cuts and infrastructure spending in the US. And China is employing fiscal measures to ease the pain of transition to a consumer-driven economy.

Forget austerity. 2017 is set to become the year of fiscal stimulus.

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The importance of currency

One factor that confused the picture in 2016 — and is likely to do so in 2017 — is currency. We saw last year the impact of shifts in currencies after sterling plunged in value. UK investors enjoyed handsome gains on European and Japanese equities, partly as a result of the relative strength of the euro and the yen. The strong showing of FTSE 100 companies since the Brexit vote is in part down to the fact that they derive 70 per cent of their earnings from overseas and these are enhanced by a weaker pound. If the pound strengthened in 2017 UK investors with holdings overseas would be hurt. Whereas, if it stays low, the sterling value of FTSE 100 companies’ dividends will continue to be boosted.

chart of sterling vs dollar

Sterling fell to its lowest level against the dollar since 2000 after the Brexit vote

Politics has a strong influence​

Politics will remain at the forefront of investors’ minds. In addition to the uncertainty caused by the coming elections in Europe, President Trump’s expected protectionist stance is likely to hurt emerging market economies and cause friction with developed markets such as Europe and Canada. A hard Brexit could create serious economic and financial disruption in the UK and drag down the UK’s already modest forecast growth rate next year.

Fidelity, the fund manager, is forecasting that company earnings around the globe will increase by a healthy 9.9 per cent in 2017, and that should help to drive stock markets higher. AJ Bell, the stockbroker, is forecasting that the FTSE 100 index will break through its previous high to end the coming year at 7,340. He believes that the sectors that have dragged down the performance of the UK stock market in recent years — banks, oils and mining stocks — are poised for, or are already enjoying, a solid recovery.

The FTSE 100 companies are forecast to pay out £78.4 billion in dividends in 2017, a 6.2 per cent increase on this year’s expected total. Although this is positive, some FTSE companies are stretching themselves financially to achieve this increase. Dividend cover — the number of times a company’s dividend is covered by its profits — averages 1.46 times, when a desirable level is at least 2 times.

UK Inflation is back

graph of uk inflation rate

Inflation has marched steadily northwards as the impact of Sterling's devaluation post-Brexit starts to bite

Monthly inflation rate figures for the United Kingdom are reported by the Office for National Statistics.

Consumer prices in the United Kingdom rose 1.6 percent year-on-year in December of 2016. That's higher than the 1.2 percent reported in November and above market expectations of 1.4 percent. It is the highest inflation rate since July of 2014 and was boosted by the rising cost of transport, housing and utilities. That's all amid a weaker pound.

Inflation Rates in the United Kingdom averaged 2.58 percent from 1989 until 2016 and reached an all time high of 8.50 percent in April of 1991. Their record low of -0.10 percent was recorded in April 2015.

Will you have more money to spend in 2017 compared to last year? Chances are that you won't.

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Real incomes of workers in the UK will start to come under pressure as UK inflation rises due to the fall in the value of the pound. Consumer spending should start to soften as this happens. We can also expect weak business investment and lower employment growth as uncertainty around the UK’s future relationship with the EU leads to a deferral of expansion plans.

Money in our wallets is going to get tighter as wages fail to keep up with inflation


Businesses and consumers in the eurozone shrugged off political uncertainty at the start of 2017. Confidence is now at its highest level in more than five years. The European Commission’s monthly survey of economic sentiment in the 19 countries that share the euro rose for the fourth month in December to 107.8. It was boosted primarily by rising optimism in France, Germany and the Netherlands. This figure was up from 106.6 in November and was well above the 106.8 reading expected by economists and its long-term average of 100.

The European Central Bank has extended its bond-buying programme until the end of the year. This decision was made despite dissent from some members of its ruling council who were concerned at the implications of continuing debt purchases.

The €2.3 trillion scheme has become increasingly contentious in recent times. Some euro members, in particular Germany, have been arguing against the use of what they see as an emergency policy at a time when eurozone’s economy is improving.

Inflation is also becoming a problem in Europe​

Inflation across the currency bloc jumped to 1.1 per cent last month, up from 0.6 per cent in November. The increase was above market expectations of 1 per cent and came as the impact of cheap oil dropped away. This inflation figure was the highest since September 2013 and is seen as trouble by the ECB. It has been fighting hard to boost growth and slay deflation. It's previously cut interest rates to zero and launched a programme of quantitative easing. But these have not been able to bring inflation to its target of just below 2 per cent.

chart of eu composite pmi

Business confidence in the Eurozone (as measured by the composite PMI) rose to a 5 year high in December 2016

Meanwhile, the composite purchasing managers’ index, which measures business activity, indicated that the region’s private sector is expanding at its fastest pace in five and a half years. The PMI is currently sitting at its highest level since May 2011 and should result in higher growth in the economy. Economists now expect the currency bloc to post GDP growth of around 0.5 per cent for the final three months of last year. That's an improvement on the lacklustre 0.3 per cent for the previous two quarters and sets it up for a solid start to 2017.

Now there is understandable concern that low growth will boost support for European populist parties. A significant move towards populism in the Dutch, French or German elections could result in a significant member state leaving the single currency. That would destabilise an already fragile economy.

The US

In the US, growth is expected accelerate beyond that delivered 2016 as Mr Trump boosts the economy. However, ‘Trumponomics’ is untested and too much stimulus could quickly overheat the US economy. Monetary tightening and an economic downturn in 2018 would result. The US stock market is already looking expensive for some.


Japan’s apparent strong performance last year (up more than 20 per cent in sterling terms) masks a poor performance in local currency terms of minus 3 per cent. ‘Abenomics’ has not really succeeded and the Japanese economy remains on life support, despite the best efforts of policymakers to resuscitate it.”

Fidelity reckons earnings growth for Japanese companies in 2017 will be 13.5 per cent, the highest of any significant region, but this is expected to translate into a return on equity of only 9.2 per cent, the lowest of any significant region, suggesting that Japanese companies are still sluggish at delivering shareholder value.

Emerging markets

The threat of a revival in protectionism triggered by the Trump administration could hit emerging markets, especially those in Asia and Latin America. A strengthening dollar caused by rising US interest rates will be a particular challenge for these economies. However, it is expected that Mr Trump’s more extreme proposals will be watered down as they pass through the legislative process. And emerging market economies have proven to be quite resilient. Earnings estimates have been improving for the first time in a number of years and valuations are low compared with developed equity markets.

Schroders, the fund manager, expects economic growth in emerging markets to rise from 4.2 per cent to 4.6 per cent in 2017. They argue that recoveries in Brazil and Russia together with government-supported growth in China will lead the way. Share valuations are reasonably attractive. However, investors should keep an eye on the long-term risks that stem from the China's increasing reliance on credit.


Low yields do not make an attractive starting point for investing in global bonds. That, together with the fact that interest rates are likely to rise, means that bond prices are likely to suffer a corresponding fall. In total, bonds are likely to offer flat or negative returns in 2017.

10 year government bond prices

10 year government bond prices are still close to their historic low, even after a small recent rebound

As ever, it should still be possible to make a reasonable return from bonds if you are prepared to move up the risk scale. This means that there is greater risk of a bond defaulting. However investors will be rewarded with a higher yield to compensate.


Oil prices saw their biggest annual percentage gain in seven years during 2016. Crude oil prices have risen more than 20 per cent since the deal between the oil exporters’ body and certain non-Opec members, including Russia, was struck in late November.

Benchmark Brent crude futures rose by more than 50 per cent in 2016, to about $57 a barrel. That was the biggest gain since 2009 when prices rose by 78 per cent. Oil prices are expected to continue their move upwards towards $60 a barrel by the end of 2017, according to a Reuters poll of City analysts. However, this could be curbed by a strong dollar, rising American oil output and expectations that the deal might not hold.

chart of brent crude prices for 2016

The price of Brent Crude rose by more than 50% during 2016 and was helped by November's agreement to curb production

Gold & Other Commodities

Little more than a year ago in 2015, the prospects for gold and other commodities were anything but golden. But the gold (and iron, copper and oil) rush seems to be on again. Metals prices have recovered strongly and have in turn driven a rebound in the shares of the world’s leading producers. However, private investors need to be wary about chasing volatile prices through concentrated exposure in a single or narrow commodity market, which are dominated by professional institutional day traders, using complex financial instruments and sophisticated trading models, systems and strategies. Therefore private investors need to be on their toes when the commodity markets are sporadically active and very patient during the protracted periods when they are not.