Consumers look to be responsible for “all the heavy lifting”, which Psigma IM chief investment officer Tom Becket said was unsustainable without earnings growth, which was currently only “moderate”.
The US could well face the brink of recession next year, with the US Federal Reserve likely to try and raise interest rates in December, with no further hikes expected in 2017, Becket said.
“A big surprise for markets in 2017 could be that the US economy teeters on the verge of recession.”
Should muted growth be the case, the consensus bull case for the dollar weakens. Psigma IM recognises a strengthening dollar could be relative, as sterling looks to be “dead in the water” in the short term.
That said, while currencies are an increasingly important factor driving returns, the ability to predict their movements has become far more difficult, as any number of political or economic factors might “cause wild swings against major trading partners”, he said.
With the commodities outlook “balanced” and oil expected to trade in a range of $40-60 until the end of 2017, US inflation forecasts were thought to be too low, and said good returns could be made from inflation breakevens – which trade on the difference in yield between a nominal bond and that of an inflation-linked bond.
“We expect core US inflation rates to rise to 2.5% in 2017. Broadly, we do not see major inflation risks,” he added.
In the UK, he said weak sterling would lead to higher inflation, but the effects would be “transitory”.
European growth would continue to “structurally disappoint”, unless the politics improved and decisive action in the financial sector were taken, to expect either of which, Becket called “wishful thinking”.
Becket has called on the Japanese government to take more decisive action to improve its economic outlook.
“The government needs to step up to the plate with support. The government also needs to be stricter with the corporate sector, which is sitting on way too much inefficient cash and is steadfastly refusing to pay wages in line with the Prime Minister’s wishes,” he said.
“The Bank of Japan will continue to explore a new paradigm for monetary policy, but will remain thwarted in their efforts as long as the impasse between the government and the corporate sector remains.”
More broadly, Becket has called the current expected corporate profit growth rates from equity analysts “nonsensical”, thinking that while corporate profitability will grow in 2017, it will be at a far lower level, with disappointment likely to be high.