Legal & General : LGIM 2017 market outlook

07 December 2016

While global growth is likely to continue next year, the economic cycle is maturing and inflationary pressures persist. In Legal & General Investment Management (LGIM)'s December Fundamentals, Head of Economics Tim Drayson (photo) comments on the key themes driving markets in 2017:

Global growth in 2016: As expected, despite the unexpected

'Early 2016 was characterised by sluggish growth, commodity price weakness and the Fed scaling back projections for interest rate increases. This, alongside other central bank easing, calmed market nerves.'

'While 2017 looks set to continue along the course of steady global growth and reflation, perceptions of a 'Goldilocks' economy might prove short-lived.'

Reflation ahead: Will economies rise on political tides?

'We believe we are moving towards the latter stages of the current economic cycle. Upside growth surprises are not necessarily good news at this point, given capacity constraints and market expectations for ongoing liquidity support.'

'To the downside, we are concerned by the building pressure on global funding conditions. We also worry about political developments. The Trump presidency raises the spectre of increased protectionism, and across Europe, anti-establishment votes at a number of upcoming elections could expose the frailties of the euro and EU.'

US: Is the economy about to overheat?

'At this stage there is little clarity around the timing and magnitude of policy changes under Donald Trump, but the numbers are potentially large on both the tax cut and spending side. The timing of this stimulus could hardly be worse.'

'In our view, the US economy is already close to full capacity and was set to grow above potential next year. Subject to overstimulation and accelerating Fed hikes, markets could be anticipating the next recession by end-2017.'

Europe: Easy money supporting growth

'Monetary conditions remain exceptionally loose in the euro area.'

'If inflation expectations can continue to move back towards levels that are consistent with their mandate, the ECB might be in a position to consider tapering later in 2017.'

UK: The one certain factor is uncertainty… Probably.

'The UK economy has been surprisingly resilient following the Brexit vote, but the consequences of the fall in the exchange rate could be felt more strongly during 2017.'

'As inflation rises, real incomes will come under pressure and consumer spending should soften. We also expect weak business investment and less employment growth as uncertainty around the UK's future relationship with the EU leads to a deferral of expansion plans.'

Emerging Markets: Capital takeaway from India and China

'Emerging markets have stabilised alongside commodity prices. However, growth is hampered by the need to slow private sector credit growth after years of global easing.'

'Our base case is China will manage a gradual depreciation at the cost of lower reserves and tighter capital controls. India could disappoint in the short term due to Modi's radical currency reforms and cash shortages, but longer term this should help to reduce the black economy and raise tax revenues.'

Equities: May you live in interesting times

'On equities, the highest conviction view is that it won't be another year of boring low single digit returns. But a fiscally induced bout of growth euphoria could end up with a nasty hangover by the end of 2017.'

'In the US alone, there are plenty of reasons to expect anything but a boring year for equities.'

ENDS.

For the full 6-page briefing of the December 2016 Fundamentals paper, by Tim Drayson and Lars Kreckel, called 'Is 2017 the year of Trumpflation), please click here or on the image to the right (PDF, 763 MB)

For more information please contact:

Nicolette Botbol
Senior Media Relations Manager, Legal & General Investment Management

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Elisabeth Steyn
Media Relations Executive, Legal & General Investment Management

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Notes to editors:

Legal & General Investment Management:

Legal & General Investment Management is one of Europe's largest asset managers and a major global investor, with total assets of £853 billion*. We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.

Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.

*LGIM internal data as at 30 June 2016. These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data includes derivative positions and advisory assets.