From the United Kingdom deciding in a referendum to exit the European Union, Donald Trump being voted US President-elect and central banks operating in a low or negative interest rate environment, there has been plenty to keep investors on alert in 2016.
Analysts suggest that 2017 is unlikely to be any less volatile. Here are some of the emerging themes expected to direct markets in the new year:
Commodity price impact eases
While the spot iron ore price finished 2016 hovering around two year highs, CommSec chief economist Craig James reckons we are unlikely to see the same degree of assistance flowing to the Australian share market from commodity prices in 2017.
Added to this is the fact that, according to James, "our share market is relatively valued at the moment with the price / earnings ratio sitting at 17.2 whereas the longer-term average is around 15.7."
So while CommSec is expecting some gains to the Australian share market in 2017, this is not anticipated to be in the same order of magnitude as in 2016.
2017 is shaping up to be another one carrying its share of political risk, with rising populism having the potential to affect policy, and implications for the markets, according to the BlackRock Investment Institute outlook and CommSec.
The Trump administration’s policies on trade and security remain question marks and the timing of the UK’s Brexit plans will determine how economic activity might be disrupted, BlackRock said.
CommSec added that elections in the Netherlands, France and Germany all carried a degree of uncertainty, particularly in view of last year's Brexit vote.
These major elections in Europe could intensify concerns of further destabilisation of the euro, State Street Global Advisors (SSGA) said in its 2017 investment outlook.
“The potential for further political tumult to impact markets abounds,” said Lori Heinel, deputy global chief investment officer at SSGA.
Proposed global trading agreements are losing support across all markets and the number of protectionist trade measures imposed globally in 2016 has been five times as many as through the same period last year, according to SSGA.
“A broad reversal in global trade is almost certainly a negative for global growth,” said SSGA.
After years of unconventional monetary policy to combat stubbornly low growth and inflation, the US is “cautiously proceeding with rate normalisation”, while central banks in Europe and Japan have “shown some hesitation to extend negative interest rates and asset purchase programs”, SSGA said.
This is raising questions among analysts as to whether monetary policy has reached its limits to stimulate growth.
“Indeed, rates are now out of the hands of the Reserve Bank of Australia – it has lowered rates about as far as it realistically can, without having the desired result, and there is little room to manoeuvre from here,” said David Bryant, chief investment officer at Australian Unity Wealth.
“The fact that the US Federal Reserve raised interest rates is a sign of ongoing confidence and strength in their economy,” Bryant said.
BlackRock sees the US leading a global rebound in inflation, with proposed tax cuts and infrastructure spending potentially delivering a boost to economic growth.
But faster inflation and rising interest rates could put pressure on bonds, SSGA forecasts.
“Investors will need to consider areas of the market that will benefit or suffer from a possible reflationary environment, altering, for example, the search for yield,” said Rick Lacaille, global chief investment officer for SSGA.
“Ultimately, we see 2017 as a year that will continue to be punctuated by significant, and at times unpredictable, political and economic change,” Lacaille said.