Investing in 2017: Expect the unexpected big 'P.I.C.T.U.R.E'

In many ways, 2016 has been a pivotal year. Market resilience to a number of unexpected outcomes was notable and, with many of the themes likely to continue into 2017, we can confidently expect the unexpected again next year.

With this in mind, it is likely that most if not all of the following will continue to grab the headlines.

- Populism

- Inflation

- Commodities

- Trump

- Uncertainty

- Repatriation

- Earnings

The wave of populism has already washed onto the shores of both the UK and the US. The raft of elections over the coming months will show whether this challenge to the status quo will be repeated in mainland Europe.

Higher US deficits resulting from this spending, potentially lower taxation, let alone protectionist policies, would almost certainly raise inflation which would in turn hit certain areas. Meanwhile, in the UK, higher import costs resulting from weaker sterling and slowly rising food and energy prices are also likely to be inflationary factors.

It appears that China is beginning to ramp up demand again for raw products, which has lifted the price of commodities of late and which seems set to continue. Meanwhile, large infrastructure projects in the likes of India (let alone the US, if the President-elect's promises are fulfilled) could add further weight to recent strength.

And so to Trump.

Already being seen as business friendly and having already flat-footed market watchers by his conciliatory tone on being elected, the US indices have gone on a tear, each testing record highs in the subsequent weeks after the election.

Set against the global political uncertainty, investors are scrambling to understand which sectors might benefit from Trump's election. To some extent, some of this has already been priced in, notwithstanding that the President-elect's "100 days" show does not begin his inauguration on 20<sup>th January. Infrastructure spending seems likely to be one of the few election promises that actually come to fruition, whilst the financial sector – banks in particular – have rallied on the prospect of lighter regulation. Meanwhile, the removal of Clinton's proposed pricing reforms has been positive for the pharmaceuticals.

This is not to say that no areas of uncertainty remain. Fallout from the election of Trump and the UK's Brexit vote are both stories for next year, as the full ramifications become clearer.

Meanwhile, currency swings, especially in light of potential interest rate rises should feature, whilst the exacerbation of Central Banks in imploring governments to add fiscal stimulus to the monetary stimulus already in place may yet prove to be little more than a distant dream. It is therefore unclear where sustained and robust economic growth may come from, and this is before the massive unwind of Quantitative Easing – which will be undertaken at some point – begins to bear down on asset prices.

Earnings could go up in the US

Another note of caution seems to be the fact that the equity market (especially in the US) have been one-way traffic – in the words of General George Patton, "If everyone is thinking alike, then somebody isn't thinking."

More positively, the potential repatriation of US cash following some kind of tax holiday from the new President could be positive not just for stocks, but for sentiment generally. Estimates vary, but some have suggested that as much as $200bn (£158bn) could find its way back to the US, and of that figure as much as $150bn could find its way into share buybacks.

Not only would such a move be generally supportive, but from a technical perspective it would immediately lift earnings per share. This will be crucial in dictating next year's outlook – the third- quarter reporting season in the US (and indeed the UK) was a success, and investors will be keen to see the momentum maintained.

In some ways, the FTSE 100 represents the highs and lows of investment. The index is up 10.4% in the year to date – including the generous dividend yield of 3.8%, this takes the return comfortably over 14% – but at any given time the constituents of the index render it hostage to the fortunes of commodities and oil in particular, the banks with the ongoing regulatory headlock and interest rate environment, and sentiment which remains skittish given the macro uncertainties.

In the meantime, the evergreen investment approach of "bottom up" stock selection has again proved its worth amongst the populist political noise this year.

It may well be, therefore, that this approach of investing in companies (which we will look at in more detail in future columns) is the most favourable and prudent strategy, as the populist political story unfolds.

Richard Hunter is the Head of Research and investment committee member at Wilson King Investment Management . The former Hargreaves Lansdown, Natwest Stockbrokers and Fyshe Horton Finney industry veteran is a Fellow of the Chartered Institute for Securities & Investment (FCSI) with over 30 years of stock market experience.