2017: A return to the 1980s? - Natixis

Research Team at Natixis suggests that with main markets movers in 2016 now in the rear mirror, are listing down their main views across various asset classes for 2017.

Key Quotes 

“Monetary policy: the Fed will hike its rates three times in 2017 (and four times in 2018) while the ECB, which will reduce its purchases from April, will in Q3 announce the practical details of the end of the QE programme in 2018.” 

“FX: fall in the euro to parity: 1.05 at the end of Q1 and then 1.02 at the end of 2017.”

“Interest rates: the T-Note will return to the 3% level (3.30% at the end of 2017) and the Bund will exceed 1.10% within one year. Sovereign spreads will remain wide in the EZ.”

“Oil: rise to $65 on average in 2017 for Brent, which will end the year around $66.”

“Positive on risky assets: equities and IG and HY credit spreads (overweight HY). US Small Caps vs. Low vol and/or high-dividend indices. Equity market sectors and interest rate increase: give preference to financials, industrials and discretionary consumption. Do not underestimate emerging markets, nevertheless while remaining discriminating.”

“2017 will be a year with more macroeconomic uncertainty against a backdrop of rising inflationary pressures and still significant political uncertainty. We can obviously mention the electoral cycle (France, Netherlands, Germany, but also Italy), to which we must add the effects of the production cuts on the oil price. These factors will fuel a protracted rise in implied volatilities in exchange rates and interest rates, a continued normalisation of bond term premiums, and sustained volatility in European interest rates and particularly in peripheral spreads. On the whole, we expect risk perception to hold at an intermediate level in 2017.”

“Monetary policy divergence will remain a key theme: the Fed’s monetary policy normalisation (three rate hikes in 2017, upside risk), extension of the ECB’s QE programme before a possible announcement of tapering in end-2017 for the beginning of 2018, accommodative bias for the BoJ and the BoE. We expect portfolio rotations to continue in favour of equities, notably in the US, where economic growth is set to accelerate in 2017. However, much of the upside for US equities is conditional upon the tax cuts promised by Donald Trump.”

“As regards emerging markets, macroeconomic fundamentals are improving, while the recovery in crude prices is a positive factor. The main uncertainties are over the effects of de-globalisation and protectionism and over the impact of a strong dollar on the economies of those countries with significant dollar-denominated debts.”

“Generally speaking, US economic policy is one of the big unknowns heading into 2017, but there is every likelihood that it will drive up inflation, interest rates, equity prices and the US dollar. In other words, a return to the 1980s. Against this backdrop with more discrimination and more dispersion, and bond performances that more or less certainly will be negative in 2017, it will more than ever be necessary to accept more risk to hope for positive performances.”