After having a month to read many outlooks and reports about the upcoming year I have determined these are the trends I believe will continue for the remainder of 2017.
1. Economic Growth
USA – I believe the US expansion is late in the cycle and will see an acceleration of growth. The USD will remain strong with a bias to the upside. I believe the US stock markets will be volatile but finish with high single digit to low double digit percentage gains.
China – The Chinese economy will receive a boost from a weakening Yuan and the stock market will perform better than expected, as Chinese stocks are not owned by the masses. Soon the MSCI global indices will include Chinese stocks and this will require managers who try to replicate the the index to purchase Chinese stocks. I believe some long term money is front running this trend.
Chinese stocks are the second cheapest (after Russia) on multiple metrics. The Cyclically Adjusted Price to Earnings is 12.8, a Price to Earnings of 7.2, a Price to Cash of 4.5, a Price to Book of 0.9, a Price to Sales of 0.6 and a Dividend Yield of 4.5%.
The Yuan has almost done a round trip over the past 10 years. This should support exports. This is assuming trade war lite is the worst we get from Trump.
Europe – Growth will be bifurcated on the Continent, with the export nations (Germany and France) accelerating while the periphery slowing. The Euro likely trades below par with USD, furthering benefiting France and Germany. Merkel will be defeated and this leads to Germany reversing strategy and and bailing out periphery. France stays off populism, but barely, with Fillon winning the election.
Is Europe bottoming? If so it could be an area of value. 9 of the 12 cheapest markets are from Europe.
Canada – I think Canada benefits from US uncertainty and the acceleration of US growth. Canadian stock markets perform well due to strong industrial and base metal commodity demand, as well as better sentiment due to greater export opportunities for Canadian crude oil. Canada, although overwhelmed with debt and with a housing bubble in Vancouver and Toronto, will be viewed as political safe haven. For example, applications for enrolment in Canadian universities by US born students has expanded recently. Some of these students will remain creating a reverse brain drain. They also spend money. Tech companies are also looking at Canada after the Trump refugee ban. This will bring money and talent to Canada.
This trend drives the currency higher than expected in the first half of the year. The TSX outperforms US stocks.
The Canadian Dollar is still undervalued on a Purchasing Power Parity basis.
2. Increased volatility due to trade war lite
Volatility has been historically low but I believe that what I am calling “Trade war lite” and traders making decisions off Trump’s tweets will spark higher volatility. Either you ignore it and check market prices less often or you trade it.
3. Reflation continues and this benefits industrial and base metals. Oil is range bound until later in 2017, unless the new Iran sanctions target oil. One concern I have, which is not founded in data but has crossed my mind is the effect of a bad crop harvest. The world has had a number of years in a row with good to excellent harvests leading to low food prices. If there were to be a bad harvest the reflation could accelerate.
4. Changing correlations – I think copper and oil will have a positive correlation with USD. The USD will also be correlated with stocks. In the second half of 2017 gold could rally with the US Dollar, as unrest, protectionism and a trade war lite could cause a global dollar shortage, pushing the dollar much higher. The decline in the Euro to par with the USD and weaker Yuan causes flight to USD and gold.
Gold still has a negative correlation with the US Dollar. Will it change in the second half of the year?
5. Th English speaking nations (Australia, Canada, India – kind of english speaking- Ireland, UK, USA) are the best performing stock markets. All these markets are near 5-year highs and may back off or consolidate during the first part of the year, but this is where I think the best risk adjusted performance comes from.
6. Unrest in the US and abroad and the increase in sabre rattling will be a tailwind for for commodities and oil. This really gets going in the second half 2017.
7. No US recession in 2017. The leading and coincident indicators are still trending up. These indicators tend to peak and begin to decline prior to US recessions.
However, many Presidents have had a recession within a 12-18 months of taking office. Will this trend repeat? I think there is a higher than normal probability for this. I will publish a report in Q2/17 on the recession probabilities for 2018. Back in 2005 I wrote a report entitled The Case for a Global Recession in 2006-2007, it is linked here. I was early and I hope to be early for the next major recession.
8. Trump’s unpredictability dampens desire for populism. Le Pen comes close in France, but the French decide they do not want their own Trump. The same happens in the the Netherlands and in Germany, although Merkel does not win.
10. The following teams will win the Stanley Cup, the World Series, the NBA Championship and the Super Bowl (Feb 2018):
Leafs, Yankees, Warriors, Raiders
Bonus – War on terror turns towards West winning due to brutal and borderline war crimes committed by Trump and Putin. I see this as the biggest “white swan” and believe its is not priced into the markets.