Geopolitics: Following the election of Donald Trump as the 45th President of the United States of America, deglobalization will probably pick up speed – as will deficit spending to further inflate the national debt. In Europe, the UK is going to try and present a roadmap for Brexit by the end of March 2017. The Netherlands will elect a new parliament in mid-March, followed by presidential and parliamentary elections in France (April/May and June, respectively). After the summer break, elections to Germany’s lower chamber – the Bundestag – will take place by 22 October at the latest. Indeed, there are plenty of opportunities for (geo) political debate and associated volatility.

Monetary policy: This will probably remain one of the key constants. Irrespective of which course the much-debated US Federal Reserve adopts, it will remain expansionary overall, as will global monetary policy. Although the European Central Bank (ECB) is not expected to cease its policy of quantitative easing any time soon, it is slowly running out of arguments. The base effects of energy prices are already becoming noticeable and give rise to expectations of low consumer prices increasingly approaching the higher core rate. In addition, public-spending programmes are garnering wider support, while deglobalization and the associated higher tariffs will encourage price increases.

Economic growth: This trend should also be positive for domestic economies, at least in major world regions. The gaps in productivity are slowly closing, albeit at a stronger pace in the US than in the euro zone. Global purchasing managers’ indices support our expectations of another positive growth year ahead.

The guiding principle for investments in 2017 should be “reflation instead of deflation” in the context of inflation rates returning to normal. The reflation trend advocates portfolios that include riskier assets (eg, equities and bonds with risk premiums) again next year. Bearing in mind the geopolitical tendencies, however, we should be prepared for greater volatility.

As far as government bonds in the western hemisphere are concerned, the concept of reflation is increasingly moving towards centre stage. The European bond market will probably prove best able to withstand this trend. Thanks to the ECB’s interest-rate policy, yields – especially at the short end – are firmly in the grasp of monetary policy. Reflation should gradually become noticeable at the long end, although, here again, the ECB’s government bond purchases will probably hinder any stronger rises. Inflation-indexed bonds and shorter durations, generally, are becoming interesting.

These three most influential factors should make 2017 an exciting year for investing in the capital markets. Fortunately, volatility management can be delegated – for example, through the use of multi-asset investments.

For more information, read the December edition of Capital Markets Monthly or listen to the audio version on Soundcloud.

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