A Triumphant 2016 and a better 2017

A Triumphant 2016 and a better 2017

2016 turned out to be a good vintage for the stock market.  US, UK, Germany and Japan stock markets all had a good run in the second half of the year (as of 22 December anyway).  Who could have guessed that?  Brexit turned out to be a great opportunity to buy stocks in developed markets and Donald Trump winning the US President Race was a turbo charge to the stock markets.  Italy referendum ended up being a celebration party and stocks rallied harder.  The currency market was skewed.  The mighty US Dollar gained so much against the Euro, the British Sterling, the Japanese Yen and the Chinese Yuan since the Trump victory.  Currency brokers had a great November and December.  The world is suddenly so beautiful and rosy if stock chart is the only reference.

2017 is definitely going to be a busy year for UK government with Brexit issues filling up their email inbox.  Uncertainties are going to be the core components in any business.  Lucky for some, the weak Sterling is a life saver.  Companies with cost base in Sterling and income in USD or oversea clients are feeling the joy.  Technology, pharmaceutical, oil, global banking and finance, tourism, education, security sectors are some obvious ones.  These companies contributed to the rally that took FTSE 100 to above 7,000.  FTSE100 had a range of 5500 to 7100 level in 2016.  Pretty much any entry point to the market during the year is a good entry point.  2016 is a good vintage indeed.  Will this trend follow in 2017?  We need to consider the currency.  Where is the Sterling heading against the US Dollar and the Euro?  There are people betting on Sterling, Euro and the USD all becoming 1 to 1.  Yes, GBP 1 = EUR 1 = USD 1.  This means GBP drops another 19% against USD.  It sounds unreal and it would be a black swan.  But an 18% drop already happened in 2016.  On the other side, can anyone see GBP getting back to 1.49 against the USD in 2017?  This would be an even bigger black swan.  Especially if one takes into the account of what the Euro zone is facing in 2017.

2017 is a year of election for the Euro zone.  The Netherlands’s General Election is on 15 March.  France’s Presidential Election has its first round on 23 April and second round on 7 May.  Germany’s Federal Election on 22 October.  Italy may also have a Prime Minister election in 2017.  Each of these could bring a new leader with a political agenda on leaving the EU.  In most EU member countries, there is a political party with leaving the Eurozone as its political statement.  It is expectable.  There are hardcore Manchester United fans and there are hardcore Man City fans.  But there is only one champion each year.  Fortunately, the Premier League champion does not get to decide on leaving the EU.  Otherwise we could be in and out of Brexit every year.  Maybe the Dutch, French and German elections would turn out to be a nonevent like Italy referendum.  I doubt it.  So there should be a few opportunities to enter the stock market in 2017.  Currency wise, Euro is within walking distance to parity level with USD, 1.047 as of 22 December.  All Euro needs to do is to swing like a pendulum and we are likely to witness EUR 1 = USD 1 in 2017.  So please do not be surprised.  A weak Euro is helping export economy in the Eurozone like Germany.  Italy and Spain will benefit as well but they really need to issue more debt to keep the country going.  Austerity stops working when your income is dropping faster than you can cut cost.  Italy has 63 different administrations and such historical setting means any austerity measure is likely to be diluted or even resisted.  Italian banks are too big to fail as that will hurt the depositors and could cause social unrest.  There is a good reason why some people think Italy needs to leave the euro and goes back to lira.  To buy time, the European Central Bank continues to print Euro, pump money to the countries that need help and allow Euro to weaken further.  Hopefully, someone will have a cure in the future.

If USD strength continues in 2017, Europe and UK stock markets have the wind behind them.  UK has already set its sail on the Brexit route.  Euro zone is likely to hold itself together in 2017 while the money printing machine probably needs to work overtime.  Assume both Euro and Sterling weakens hand in hand against the USD, 2017 could be a good vintage in volatile weather conditions.