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2016 review: The underdogs bite back

• 2016 ended up being a reasonably good year for risk assets. Only government bonds failed to deliver a positive return. Global high yield bonds led the way as default risk eased in the US energy sector, while equities rebounded from early weakness, and even endured several major political shocks.
• The year will be remembered for Brexit, Trump and Renzi, partly due to the unexpected nature of some of the results, but also the potentially profound shift in international relations in coming years. There were a range of other political events that did not disappoint too, Dilma’s eventual ousting helped return optimism in Brazil, while Spain finally managed to assemble a somewhat stable government.
• Running out of room, central banks experimented with negative interest rates, without much success. Meanwhile, the Bank of England was engulfed in accusations of seeking to politically influence Brexit. Overall, the divergence in monetary policy that was expected played out, and is likely to remain a theme for 2017.

The Trump trade: how far can it go?

• Investors have bought into the Trump or reflation trade on hopes of stronger growth, rising inflation and higher interest rates. Risk assets are rallying, the dollar has strengthened and capital has flowed out of emerging markets.
• We factor a fiscal boost into our forecast, but the impact will not be felt until 2018. Meanwhile, President-elect Trump’s fiscal proposals must navigate the tricky waters of Congress where House Republicans are more focused on tax reform than tax cuts. There are also questions over the impact of tax cuts and infrastructure spending on real growth.
• Political risk shifts to Europe in 2017 with the risk of an upset in France or Italy potentially threatening a break-up of the euro.

Views at a glance

• A short summary of our main macro views and where we see the risks to the world economy.