Date
21 July 2018
Among the uncertainties that the financial world faces this year is whether Donald Trump can deliver on his campaign promises. Photo: Reuters
Among the uncertainties that the financial world faces this year is whether Donald Trump can deliver on his campaign promises. Photo: Reuters

Why 2017 is not the time for investors to be brave

The investment world witnessed various black swan events last year. Now, 2017 could also turn out to be a year full of uncertainties and grey swans, if not black.

In Europe, UK will kick off the official process of leaving the eurozone, and there are upcoming elections in France and Germany.

Various far-right parties have emerged among EU member nations after the Brexit vote. A series of elections and referendums across Europe in the new year could plunge the EU into chaos this year.

If the outcomes of elections come as a surprise, it could send shockwave to numerous struggling European nations.

The euro has been suffering from the lack of a centralized budget system, and such loopholes could hamper economic recovery in the eurozone. The region might be mired in lackluster growth, low inflation and high debt for a long time.

In the US, Donald Trump, who will officially become the president on Jan. 20, represents the biggest grey swan among all.

It remains unclear as to what extent he can deliver his campaign pledges, such as tax cuts, fiscal spending, trade protectionism, etc. Those issues will weigh on US equities and the dollar.

The market has high expectations of Trump’s fiscal expansion measures, but in practice, things may not proceed as smoothly as hoped.

In fact, if Trump’s measures rekindle inflation or inflation expectations considerably, it could lead to a tightening of global liquidity. That, I believe, is one of the biggest risks investors face this year.

Elsewhere, investment banks have also named a number of other potential shocks, such as US productivity changes, China’s possible currency float, European Union reforms, and return of emerging market capital controls.

Given the poor visibility on the markets’ prospects going forward, investors are advised to focus on defensive stocks, at least in the first half of the year.

This article appeared in the Hong Kong Economic Journal on Jan. 16

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Senior investment banker

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