Global market overview - Beware the flames of inflation
From the US in the West to China and Japan in the East, we see price pressures accelerating next year in virtually every major economy, with global inflation hitting a four-year high. In the US, Donald Trump’s victory in the presidential elections is likely to further stoke the fire as promises of extensive infrastructure spending and tax cuts pump billions of dollars into the economy and boost commodity prices.
In the UK, meanwhile, prices will be pushed up by the 12 per cent slump in sterling’s trade-weighted exchange rate since the June referendum vote to leave the European Union.
The change in the investment climate will also be characterised by heightened geopolitical risks and a looming reversal of one of the most potent investor-friendly trends of recent years – ample liquidity.
Politically, the spotlight is now on continental Europe. Following the surprises of the Brexit vote and Trump’s win, investors will be looking for any signs of similar anti-establishment feeling in Italy’s constitutional referendum this December, as well as in the German general election and French presidential polls in 2017. The liquidity path is, arguably, easier to predict. We now forecast three US Federal Reserve interest rate hikes by end-2017, starting this December. This is an increase from the previously expected two hikes as we think that Trump’s fiscal loosening will be counteracted by tighter monetary policy.
In the euro zone, the European Central Bank's quantitative easing programme will almost certainly be extended beyond March, but we expect that liquidity injections will be reduced by the end of next year to EUR60 billion per month as inflation and growth pick up.
In total, we believe that between them the Fed, the ECB and their counterparts in the UK, China and Japan will generate USD900 billion of net liquidity in 2017 – an almost 50 per cent decline on this year’s USD1.7trillion and compared to an average of USD1.2 trillion per annum over the past seven years.1
More positively, global corporate earnings should benefit from an acceleration in nominal gross domestic product (GDP) growth and could rise by as much as 13 per cent globally compared with a paltry 1 per cent this year. Bigger profits, in turn, could encourage companies to step up capital expenditure, enabling business investment to surpass consumer spending as the main source of economic growth.
The broader economic recovery – while still relatively muted – is becoming increasingly widespread. Leading indicators and global business confidence are rising in all major economies and we see scope for positive surprises in the US, euro zone and Japan on the back of more expansionary fiscal policy.