Ryan McGrath: Time for markets to buckle up to deal with uncertainties

Brexit, the Donald Trump presidency and a rise in isolated terrorist attacks were some of the shocks that investors faced in 2016, writes Ryan McGrath.

Despite the volatility, equity markets have made solid gains — particularly in the US but also in Europe. 

The costs of borrowing for governments remain low by historical standards and commodities have started to move higher. As the market looks towards 2017 there will be no shortage of risks. 

Political risk, further questions over the future of the eurozone, the fallout from Brexit along with rising interest rates are just some of the challenges in the coming months.

Countries accounting for about 40% of the EU economy are going to the polls in 2017.

Elections are scheduled in frontline European countries such as the Netherlands, France and Germany, with the possibility of elections in Italy too. Under normal circumstances, elections unnerve investors.

The shift in voters attitudes away from the centre and towards the right with an anti-European bias makes the 2017 elections far more uncertain. 

Starting in March, with the Dutch parliamentary elections, the far-right populist Geert Wilders and his Freedom Party will go head to head with the incumbent prime minister Mark Rutte. Mr Wilders is performing well in the polls and has called for a Dutch referendum on leaving the EU. 

A similar theme is expected to be played out in the French presidential election but on a larger and potentially more volatile scale. 

The first round of the French presidential election is in April with the runoff in early May.

The election will be a test of how close the National Front’s Marine Le Pen will come to France’s highest office, in a showdown with the centre-right and Republican nomination Francois Fillon. 

Current polls indicate Mr Fillon is the favourite, however, given the unreliability of polling data, a victory for Ms Le Pen would have grave implications for the European project.

Angela Merkel, the German chancellor, will seek a fourth term as the country struggles with a surge in far-right extremism, domestic terror attacks and an influx of more than one million migrants.

Ms Merkel is well respected by market participants and the continuity is important for investors. Italy, and particularly the Italian banks, will remain a theme in 2017.

Monte dei Paschi, Italy’s third-largest bank, is in need of raising capital as deposit flight accelerates. Monte dei Paschi’s troubles have tainted the country’s wider banking system and added to fears that the Italian taxpayer will be forced to bail out the banks.

Coupled with the fragile Italian political climate, investors will remain nervous regarding Italy’s ability to destabilise the region.

UK prime minister Theresa May is committed to invoking the Article 50 of the Lisbon Treaty, which will begin the EU exit negotiations, by the end of March 2017. Brexit remains the major short-term risk for Ireland. 

UK economic data has remained resilient since the vote on June 23, however, most analysts expect the economy there to deteriorate in 2017. 

Retaining access to the single market and the social implications of any potential hard border with the North are all significant issues for investors. The uncertainty over Donald Trump’s policies particularly with regard to international trade remain a concern. 

There are worries Mr Trump’s anti-globalisation views will spread protectionism, putting up trade barriers and curbing economic growth.

The era of monetary stimulus from central banks is coming to an end. In the US, the fiscal stimulus expected from president-elect Trump has caused investors to anticipate that the US Federal Reserve will raise interest rates three times in 2017. 

In Europe, interest rate hikes remain a distant prospect but the ECB has started scaling back its monthly bond purchases.

The market has proved resilient to external shocks and, in the past, political-induced risks have been a buying opportunity. Meanwhile, the world economy is projected to grow by 3.5%. 2017 will be an interesting year for markets.

Ryan McGrath is a senior analyst at Cantor Fitzgerald Ireland.

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