Abu Dhabi: If you thought 2016 was the year of equities, get ready for another bull run. And you have the US Federal Reserve (and Donald Trump) to thank.
In 2016, despite the strong volatility, main equity indices have gone up, with the Dow Jones Industrial Average’s year-to-date return at 14.4 per cent as the index flirts with the record 20,000 level. Meanwhile, the S&P 500 and the Nasdaq Composite Index have 10.7 per cent and 8.9 per cent year-to-date returns respectively.
And analysts expect equities to outperform other asset classes in 2017, with continued gains particularly in US equity markets on the back of more frequent interest rate hikes. At its meeting on Wednesday, the Federal Reserve hiked interest rates by 25 basis points and signalled three hikes in 2017.
“My net view is you want to be in dollar-based equities. The interest rate hikes are good for the US, and even for the GCC region because they’re pegged to the dollar, and you would expect to see these markets do fairly well.
The industries that would do well are financials, of course, because you find that banks perform better in the rising interest rate environment, and if the overall economy is performing well, you find that’s also good for banks,” said Saleem Khokhar, head of fund management at the National Bank of Abu Dhabi’s asset management group.
Less regulation
In the US, equity markets are also expected to benefit from the incoming Donald Trump administration whose agenda is pro-growth and pro-job creation.
More importantly, President Elect Trump has called for less regulation as well as tax cuts on large corporations — a move that will help companies’ financial performance and overall equity markets.
But even in equity markets, it won’t be solid gains across the board. While financials will benefit from additional rate hikes, defensive stocks such as utilities will be hurt, according to Chris Probyn, chief economist at State Street Global Advisors.
“You can’t just plunge into equities; I think you have to be selective. The potential repeal and reform of Obamacare could have some effect on the US pharmaceutical stocks. In energy, Trump has talked about restoring coal-mining jobs to West Virginia, so I think it’s going to be less regulation and more sympathetic job creation, so it could be reasonably positive for the energy companies,” he said.
Bumpy ride ahead
However, that is not to say that equity markets, including those in the US, are set for a smooth ride in 2017.
Vijay Harpalani, fund manager at Al Mal Capital in Dubai, said 2017 appears to be another challenging year what with possible surprises from elections in France, Germany, and Netherlands, coupled with potential surprises in policy actions by Trump.
“Key events to keep an eye on also include sharper interest rate increases. Opec’s implementation of oil production cuts and willingness to cut even more, if required, bodes well for oil prices in the short term, until shale supply catches up. Against this backdrop, we would expect volatility in asset prices next year.
We would recommend a balanced portfolio that is more skewed towards equities and short-dated US dollar bonds with attractive credit quality,” he said.
Gold sidelined
With equities emerging as the clear winner among fund managers, expect some downside on gold prices as investors shift to a risk-on mode. The fact that gold offers no yields (like coupons or dividends) makes it all the more expensive to hold.
“Gold is perceived as a hedge against inflation and geopolitical uncertainty. Until mid-2016, gold prices were up 29 per cent, but after Trump won the US elections, prices fell 11 per cent on prospects of fiscal stimulus, higher interest rates, and strengthening of the dollar. These factors will likely act as negative catalysts in 2017 as well,” Harpalani said.
Caution on fixed income
Any turbulence in Europe, though, in 2017 such as growing rise of anti-European Union parties and any ‘black swan’ events may provide support for gold prices, too.
NBAD’s Khokhar echoed a similar sentiment, pointing downside potential for fixed income as well.
“You want to be overweight on equities at this point, with the preference being for dollar-based equities. You want to be a little bit careful on the fixed income side of the equation, which, in a rising interest rate environment, could be negatively impacted. Gold, I think, is probably going to be a little sidelined given the environment. In terms of currencies, I think the dollar, on the long term, should do fairly well against other currencies,” Khokhar said.