2017 will bring volatility and risk alongside opportunities
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Morningstar's Forecast 2017 reflects on an exciting 2016, seeing more volatility and risk ahead as Trump takes office and European countries hold populist elections, with corresponding risks and opportunities across the Australian market.
The report notes that, looking to 2017, we are living in a higher-risk world.
Following the Donald Trump victory in the US election, investors flocked to resources and cyclical sectors, "believing Trump's proposals to lift economic growth and inflation will deliver".
It notes these sectors had since become crowded, while investors had deserted bonds and bond-proxies, which were conversely "uncrowded trades."
In response to the higher risk global market anticipated into 2017, the outlook notes "prudent investors should reduce their risk profile."
"To reduce risk, investors should reduce their exposure to volatility. Volatility tends to be higher in crowded rather than uncrowded trades."
Despite the rise in market valuations and sentiment that has resulted in the weeks immediately following the US election result, Morningstar urges investors act with caution.
"Valuations are stretched…the equity risk is in fact much higher than the market is currently pricing. The margin of safety is lower and risk higher.
The outlook notes that the strong performance of global equity markets following Trump's win "sees all major US indices at all-time highs. The higher they go, the greater the potential disappointment in 2017."
Outside the US, it also highlights an expectation that uncertainty will persist across much of Europe --with elections in in France, Germany, The Netherlands and the start of Britain's exit from the European Union.
"There is more upside in global equity markets in the short term, with positive momentum as the driving force. However, we believe there is greater downside risk thereafter."
Australia's overdue dose of reality
On the homefront, the 2017 outlook suggests the Reserve Bank of Australia is unlikely to lift the official cash rate during the year.
It anticipates the Australian dollar will likely trade between 70 cents and 75 cents US--and that the potential loss of our sovereign triple-A credit rating could have further downside implications.
However, it also expects continuing growth in China, which will support Australian exports including mining, agriculture, education and tourism.
The outlook points out where Australian investors will find longer-term opportunities in 2017.
It also provides detailed sector earnings and valuation outlook, with expert insights from Morningstar's equity analysts.
Three prominent examples are banks, healthcare and mining stocks, with neutral, positive and negative outlooks, respectively. All other market segments are also covered extensively, including insurance, telecommunications, media, technology, retail, mining and energy.
In terms of Australia's economic and interest rate outlook, Morningstar's senior credit analyst John Likos outlines the key themes for 2017, challenges and his assumptions for government bond yields and corporate bond spreads.
Morningstar's Premium subscribers receive full access to the Forecast 2017 report. Non-subscribers can also view the report by registering for a free trial subscription.
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Glenn Freeman is Morningstar's senior editor.
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