Continuing our countdown to Christmas, Stephanie Flanders discusses an end to global deflation fears and the prospect of long-awaited higher rates.
2016 will be remembered for political upsets, with the UK vote to leave the European Union and the election of Donald Trump as US president highlighting voter dissatisfaction with mainstream politicians and parties.
For investors, it will probably also go down as the year when global deflation fears came to an end, long-term interest rates finally started to rise and central banks stopped being the ‘only game in town'.
Faster reflation and reduced emphasis on monetary policy would both tend to increase the returns of equities relative to bonds in the future, and to point investors in the direction of cyclical assets over more defensive ones.
Within fixed income, it would also tend to argue against holding long-dated bonds. But the structural and supply-side factors that are constraining global investment and productivity growth, and pushing up the relative demand for safe assets, have not gone away.
These structural constraints, coupled with the fact the US is much further along the reflationary road than other parts of the developed world, suggest the search for both income and new forms of ‘safety' will continue to be crucial for investors.
Politics and policy are likely to dominate headlines again in 2017, with Brexit negotiations due to start and key elections in Europe.
For investors, however, we would argue the real economy will continue to be the most important factor - especially supply-side dynamics in the US, the resilience of the eurozone and UK recoveries in the face of uncertainty, and the pace and extent of any further appreciation in the dollar.
Stephanie Flanders is chief market strategist for the UK and Europe at JP Morgan Asset Management.
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