Trevor Greetham, the head of multi-asset at Royal London Asset Management, said the greatest challenges next year will “fall squarely” at Europe’s door.
Speaking to FTAdviser, Mr Greetham pointed to the Dutch, German and French elections which are currently on the agenda next year.
“Multiple elections in Europe will contribute to an unstable backdrop," he said.
“We will be keeping a close eye on our investor sentiment indicator, and looking for opportunities to add to stocks in a short-term panic and lighten exposure when things seem too good to be true.”
He said the “wave of populism” which triggered both Brexit and Donald Trump’s US presidential victory could give power to groups arguing for their country to leave the euro.
“Although a euro break-up is unlikely in foreseeable future, fear that this is the way things are heading is likely to hang over European markets,” Mr Greetham said.
“Adding in Brexit fallout and a diminished likelihood of any kind of trade agreement with the US, there is no doubt that Europe faces numerous headwinds both from home and abroad in 2017.”
Stocks tend to beat bonds when global growth is picking up and we expect this trend to continueTrevor GreethamPointing to the UK, however, Mr Greetham said economic data has held up well since the Brexit vote, helped by sterling’s devaluation.
Yet he expects growth in the UK economy to slow down next year as rising inflation squeezes real household income.
The multi-asset boss also said ongoing uncertainty over the nature and speed of the UK’s exit from the European Union will impact corporate hiring and capital spending plans.
Mr Greetham said his Investment Clock model, which guides the asset allocation of his portfolios, has spent the last six months in the ‘overheat’ phase of the business cycle, characterised by rising growth and inflation.
“Stocks tend to beat bonds when global growth is picking up and we expect this trend to continue.”
He said it was likely the Fed will continue to inch up the interest rates in the New Year, but said it might be a “lone hiker” among the big central banks in 2017.
“We expect monetary policy divergence to continue to fuel the dollar strength that started at the end of 2016.”
Meanwhile, Japanese equities have responded well to increasing dollar strength against the yen.
Mr Greetham said he expects Japan to be a “Trump winner” in 2017, particularly if domestic monetary and fiscal policies are successful in stimulating growth.
Commenting on the overall picture, he said 2016 appears to be ending on a strong note, with stock prices rising and bonds falling, against an improvement in business confidence and a ‘glass half full’ attitude towards the potential policies of Mr Trump.
katherine.denham@ft.com
