My 2017 forecast – Sell most things

Stephen Koukoulas

It’s that time of the year – making the calls for the year ahead for the economy and financial markets. Key themes for the year include; ongoing sluggish growth in Australia with house prices set to weaken markedly, possibly fall. US (and most global) stock markets to fall, perhaps quite sharply. US dollar to weaken, Euro to rise strongly, linked to a reversal to the current market over reaction to US politics. The moves have been irrational. RBA to cut interest rates, bond yields to have only a limited sell off. Without further ado, here are the Top 10 on the economy and markets, plus a couple on sport and horse racing.

1. Global stocks

When the dust settles from the irrational market reaction to the US Presidential election win of Donald Trump, US (and most global) stocks seem set to fall. Trump policies in trade, foreign affairs, accountability on government spending and tax could all conspire to undermine confidence when the reality of the misguided policy strategy of Trump moves to reality. How much weakness is hard to say, but the Dow, for example, back to 17,500 would seem likely. It could fall further than this.

2. The ASX

With the bearish lead from the US, a likely dip in commodity prices and a firm Australian dollar, expect some pull back during 2017. The ASX may hit 6,000 in the early part of the year, as local interest rate cuts are delivered but the negative influences from offshore will likely counter that. A dull forecast, in many ways, but 5,250 for the ASX200.

3. The Australian dollar

Interest rate cuts locally and pull back in commodity prices should be negative for the AUD, but with the USD also likely to weaken, the AUD may only fall to US$0.68 to US$0.70 before finding favour and ending 2017 nearer 0.75 that 0.65. More likely and the best trades, the AUD will weaken against a resurgent EUR (target 0.6250), CAD (0.93) and NZD (0.98). Any confirmation of a credit rating downgrade, with related policy shortcomings, will help to undermine the AUD.

4. Monetary policy and bond yields

The RBA to cut interest rates to 1 percent with low inflation and weak growth the key factors. A reversal in the recent terms of trade gains will help fit the rate cut scenario. Bond yields, which has sold off sharply since the middle of 2016, may weaken a little more – Australian ten-year yields could well end 2017 little changed around 2.75 percent but might test 3.5 per cent in the early part of the year.

5. GDP Growth

The economy is likely to muddle along – real GDP growth will bobble around 2 per cent right through 2017. A few hints of optimism will be dashed with bouts of pessimism. Consumer demand will remain soggy; business investment will keep falling, and from around the middle of 2017, dwelling investment will fall sharply through the year. Exports will help to underpin growth, as will strong government spending.

6. Labour market

The economy will not create the jobs needed to drive the unemployment rate lower or to fuel a much-needed pick up in wages. The unemployment rate is set to end 2017 higher than in 2016 at 6 percent, perhaps a little more. Wages growth will remain low at around 2 percent, with risks that it will drop to 1.75 percent. The bias to part-time employment is likely to continue meaning that hours worked and household income growth will be constrained.

7. Inflation

Inflation will edge up from the record lows of 2016 but is unlikely to break above the mid-point of the RBA 2 to 3 per cent target range. More likely, underlying inflation will spend most of 2017 around 2 per cent with a slight uptick to 2.25 percent by year-end. The recent commodity price spike may impact headline inflation over the next couple of quarters.

8. The Budget

The budget numbers will remain problematic, so much so that the triple-A credit rating from all three major agencies will be lost. The deficit for 2017-18 will be close to $25 billion with high government spending and soggy revenue holding back any narrowing. During 2017, gross government debt will exceed half a trillion dollars for the first time. The government may get some benefit from an upgrade to its very gloomy commodity price forecasts presented in MYEFO.

9. Commodity prices

Watch for a moderate pullback after the stellar run of 2016. Good old fashion supply and demand mean oil is likely to head back to US$40 a barrel, iron ore US$60 a tonne, Coal will drop very sharply, by around 50 per cent, as a glut of production unfolds. Gold which has been a dog may find a few friends at these lower levels and could be a shining light amid the general weakness - maybe US$1,300 an ounce.

10. House prices

The glut of property will be felt, and overall price growth will stall. This, of course, means there will be a few pockets of weakness and prices fall, but with interest rates low and underlying demand strongly supported by a likely 350,000 people in Australia during the year, any price weakness will be moderate. Plenty will be written about this during the year.

11. Sport and horse racing

Collingwood and South Sydney to win respective premierships at big odds: A horse called We Have Lift Off wins for quality races through the year and Hotel Amour shows staying potential with a couple of quality runs as a three-year-old.

Overall:

In my view, to use the market parlance, sell stocks – especially in the US and the UK, sell the US dollar and sell commodities with bond yields set to tread water. But do your own thinking before following any of the above forecasts. They are not a recommendation for trading and see you financial advisor before investing your hard earned.

Contributed by Stephen Koukoulas: (VIEW LINK)


Stephen Koukoulas

Stephen Koukoulas has a rare and specialised professional experience over more than 25 years as an economist in government, as Global Head of economic and market research, a Chief Economist for two major banks and as economic advisor to the Prime...

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John Boardman

So where do you invest your money in 2017 (other than term deposits) if everything is a sell?

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Dean Tipping

Collingwood for the flag Kouk? Really!! Pies to struggle with the President & cockroach to come under significant pressure...go the Dogs!!

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