02 Jan The Economic Outlook for 2017 & The Challenges Accountants Face
The annual Chartered Accountants CPD Blitz is fast approaching and this year I am honoured to be a guest speaker, presenting Nationwide. During these events a variety of relevant topical issues will be covered including key challenges that chartered accountants face on a daily basis and the economic outlook for 2017.
For those accountants that are investment advisors this is a tricky time and for some offering advice can be quite complicated. Old reliables such as deposits, bonds and tracker bonds yield no return. There are major events happening in the market and major economic policies being followed that are very confusing. In addition to this, there is access to direct investing technology, which in some instances may be good but can also be daunting.
For accountants providing financial advice, there are a number of challenges to face. Those being:
- Money on deposit could erode due to inflation.
- Traditional products no longer work.
- Customers are trending towards self-investing technology.
- How to find good products and the best investing opportunities available.
- Eroding money on deposit
If Trump does go on an expansionary path he could ignite inflation. Think what a 3% inflation rate will do to you savings if you are on deposit. There are €98billion of retail deposits in Ireland, a staggering figure, running bank risk for no return.
Traditional investing products are normally linked to interest rates and therefore now, do not perform. We have to accept low capital guarantees to get the potential of any returns at all! In other words take on risk. Certain markets, like equities and bonds, are very high are a ticking time bomb.
The availability of direct execution technology platforms is another challenge. Being at the forefront in educating about this technology I can see the benefits and downfalls. There are many investors whom this technology does not suit. Do you want your portfolio marking to market on your phone every minute? Some investors get carried away and over trade. Investing is a long game not a day to day exercise. Accountants need to be able to point out the dangers this technology brings.
Good products and investing opportunities
Are there good products and investment opportunities out there? Well, the answer is yes there are. We may need to see the colour of Donald’s money before we jump in but a well-built balanced portfolio encompassing the best product in class can yield in the region of 8-12% annually. That may include some deliberate currency exposure, commodities and an ‘absolute return fund’ but the returns are there we just need to look harder to find them.
Economic Outlook 2017
For 2017 there are three big questions to ask, the answers to which will greatly affect the global economy. Those being:
What will President Trump really do?
Will he cause a re-think of central bank policy globally?
Where is the oil price heading?
What will Trump really do?
Before getting onto the subject of Trump it is important to remember that the U.S. is a democracy, not a dictatorship. So, despite the scary headlines from the President-elect he is not going to be able to implement a lot of his crackpot ideas. Regarding the markets, they are divided when analysing his potential influence mainly because we do not know his team or his core policies. He has begun to transition away from his original promises and already he has rolled back from dismantling Obamacare in full. Initial expectations are for an expansionary spending spree and a bit of protectionism; this is good for some US stocks and the dollar. It may raise inflation and bring back some interest rates; this is good for investors. On the other hand, he may overdo the protectionism and slap tariffs on Chinese and foreign imports. This will cause global chaos! So until then we must lie in waiting for Trump’s policies residing in a state of confusion and in anticipation of what and how much will be enacted.
Will he change the central bank policy globally?
If he does change economic policy radically the big question is if other central banks will follow suit. In Europe and Japan, we have had the same strategy now since 2008, austerity and cheap money from banks to stimulate lending, growth and inflation. In reality, the low-interest rate strategy has been a total failure, little sign of growth in Europe and none in Japan. Will Mario Draghi change course in the face of a spending spree in the U.S. and lift the monetary shackles in Europe? France and Italy would love that! On the other hand, think what would happen to the Euro/Dollar exchange rate if he doesn’t! I think we have the possibility of some major economic policy shifts in 2017.
Where is the oil price heading?
The last big macroeconomic trend driver is the oil price. Remember when oil was below $30 a barrel last February, the Dow was 15% lower than it is now. Here is the thing about the oil price. If we expect oil to recover above $60, oil-producing countries survive, and the smaller oil companies survive too. Most of these players have a breakeven price in the mid-fifties. Their banks will be supportive as the losses being incurred now will be seen as only temporary. Now picture oil down at $30, and it is a totally different story, companies and countries may go bust, and that is a scary scenario for banking. So regardless of anything Trump decides a falling oil price could stump the market.
I hope to see you at one of the events before Christmas.
Peter Brown is the Founder & Senior Investment Advisor of Baggot Investment Partners | www.baggot.ie