Brexit is the one political event likely to have the most impact on investors over the next few years.
But as the UK moves to trigger Article 50 and negotiate an exit from the European Union this is by no means the only significant political milestone that is expected to influence investment behaviour and outlook in the months and years to come.
Years of monetary intervention, which became all-but imbedded in the macro-economic policies of governments globally following the credit crunch, are also reaching a natural pause.
The importance of fiscal, rather than monetary, policy will be a key theme to emerge going into 2017, according to fund managers.
James Illsley, group European portfolio manager for JP Morgan Asset Management, says investors now need to factor in some emerging policy themes.
He explains: “Brexit has caught the attention of everyone but there are a number of other issues to watch out for - the more micro policies in terms of the UK domestic economy and the wider economy in terms of reflation, which is an international theme gathering pace.”
Mr Illsley says Brexit remains too much of an unknown to generate any bold predictions.
“Brexit is the big issue we will be facing over the next two to three years but as negotiations progress it is hard to know what shape any agreement will take.”
One way Brexit is continuing to manifest itself is via currency fluctuations.
Mr Illsley says: “What we have seen is a very immediate impact on Sterling post referendum and it (currency) continues to reflect the various mood swings.
“Longer term we would expect Sterling weakness to be a benefit to UK goods and services. Seventy-five per cent of the large caps get their earnings from abroad.
“And if currency is acting as a pressure valve then Brexit negotiations that look as if they are going to yield a less positive deal will see sterling weaken, while if things go well it will strengthen.”
He adds: “Micro policies such as renewed support for housing and house building as well as support for first-time buyers will also play out in equities.
“The introduction of the national living wage is also being watched for its impact across UK businesses.”
Autumn Statement
Policy changes made in chancellor of the Exchequer Philip Hammond’s Autumn Statement are also likely to play out.
Nathan Sweeney, senior investment manager at Architas says although it was not a headline-grabber, the Autumn Statement’s pledge to lower corporation tax from the current 20 per cent to 17 per cent by 2020 was a key announcement.
He says: “It would be the lowest rate of all advanced economies worldwide.
“For comparison, 2016’s average rate for European Union member states was just over 22 per cent.”
Mr Sweeney explains how news like this can be significant for companies’ management teams, because it influences their decision-making processes and can increase confidence in the home government.
He says: “I’d expect a number of international businesses to suddenly find the UK a more attractive destination now, as well as making it an easier decision for companies already here to keep their operations in the UK.
“Given continued uncertainty around Brexit, this pro-business move aims to put the UK on a stronger footing.”
John Husselbee, head of multi-asset at Liontrust, also points to the emergence of populism as a possible driver of policy and the economy.
The UK government’s unveiling of a £23bn investment in technology, housing and innovation over the next five years was an example of populist policy making.
He expects more of the same approach from the government in 2017.
Mr Husselbee says: “The driving forces behind this political trend are the same that may see a rejection of globalisation and a rise in domestic fiscal investment – via infrastructure projects for example.
“Few would argue that globalisation does not serve to increase productivity within the global economy, but the man-on-the-street in the developed world is becoming increasingly aware that the benefits may be accruing not to them, but rather to developing nations, who are closing the inequality gap, and to international businesses (and their shareholders).”
He says such policy will likely inflate wages and prices, and continue to drive bond yields.
Mr Husselbee also predicts the move towards more fiscal policy making could result in a ‘desynchronisation’ between the bond yields of different economies.
He says: “Synchronisation between asset classes internationally has been rising, a result of global efforts to stage a recovery from the 2008 global financial crisis.
“One of the main effects of quantitative easing has been to drive valuations up across the board, defying the traditional negative correlation between equities and bonds.
“Monetary policy may now be falling out of favour, but fiscal stimulus is back in vogue, underpinned in the UK and US by infrastructure projects.
“As witnessed in the Autumn Statement, in which the Office for Budget Responsibility estimates of a £10bn 2019 to 2020 surplus flipped to a forecast of a £22bn deficit, this has a knock-on effect on debt markets via higher government borrowing.
“When combined with a trend to restrict the free movement of labour, the take-away from the Brexit vote and Trump’s election is clearly reflationary.”
Chris Kinder, fund manager of the Threadneedle UK fund, says investors need to brace themselves to deal with much more noise as events outside the UK - the impact of Mr Trump’s presidency and issues with oil supply - make themselves felt.
He says: “Our outlook is for ‘more of the same’ which means investors need to expect elevated volatility across markets as participants continue to adjust to the evolving environment.
“We believe this will create opportunities for fundamental stock picking.”
Key policy influences
Brexit - the UK voted to leave the EU but the invocation of Article 50 has yet to happen - a great unknown that could mean positives and negatives.
Infrastructure investment - UK and US governments have promised this, so expect inflation to rise.
A move towards fiscally-driven policymaking and an increase in government spending as a way to grow an economy.
A move away from monetary policy - less reliance on interest rate mechanisms which in any case have little room for downwards movement and in influencing the money supply, which again has reached a crunch point in its effectiveness.
