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2017 Q1 Outlook

Trumponomics and Macro Forces in 2017

Todd Mattina, Chief Economist and Strategist on the Mackenzie Asset Allocation Team, outlines the macroeconomic forces that will impact asset prices, emerging markets and the overall market in 2017.

Q1 Outlook: Trumponomics and Macro Forces in 2017

Todd Mattina, Chief Economist and Strategist on the Mackenzie Asset Allocation Team, discusses the macroeconomic forces that will influence the market in Q1.

Show transcript

Todd Mattina Q1 Transcript

So, ever since the surprised election of Donald Trump, markets have appropriately priced in higher growth and expected inflation next year. The future direction for asset prices depends on three factors.  First, the size of the fiscal stimulus can be smaller than expected as deficit averse Republicans and Congress pair down the increase in the deficit. Second, the large scaling up of infrastructure can take longer than expected, delaying the expected growing payoff into the later years of a Trump presidency and third, the Fed can hike rates faster than expected to try to combat rising expected inflation. That can lead to a stronger dollar, tighter financial conditions - all of which would unwind some of the growth payoff from a fiscal stimulus. All in all, we see higher expected growth in the U.S. next year of about 2¼%, roughly a ¼ point high than its long-run trend rate.

So, many emerging markets will face continuing pressure in 2017 from a perfect storm of slowing global trade growth, tighter financial conditions and a rise in global interest rates and the strong U.S. dollar. These factors will weigh particularly on emerging market, corporate borrowers that took on large debts denominated in U.S. dollars just as their returns on equity began to trend downward. These factors will also weigh heavily on China given concerns about the slowing economy, a mountain of red ink, and repeated local asset bubbles. In fact, Chinese foreign exchange reserves have dropped by almost a trillion U.S. dollars since their peak in 2014 and these pressures on capital flows heading out of China look set to continue, which will weigh on domestic liquidity conditions and possibly a slow credit growth, which has been an important anchor for the Chinese growth model going forward.

Well, building on world-wide populous sentiment in 2016, political risk looks set to remain top-of-mind for investors next year, as headlines continue to drive market volatility, including  two of Europe's leading economies, France and Germany, hold national elections. The risk is that increasing populous sentiment in Europe could affect European government's ability to take on urgently-needed reforms such as strengthening the troubled European banking system.

For more information, please refer to the January edition of Mackenzie Express.

Key Points

  • The future direction for asset prices is uncertain and dependent on the size of fiscal stimulus, the pace of large scale infrastructure and the possibility of faster rate hikes by the Fed.
  • Many emerging markets will face continuing pressure due to slowing global trade growth, tighter financial conditions, a rise in global interest rates and the strong USD.
  • Political risk looks set to remain top of mind, as headlines continue to drive market volatility. 

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