As we move into 2017, we can reflect on a year that brought us two political earthquakes in the form of Brexit and Trump (the "Brump", as I called it in a previous column), but also pretty good investment returns for those charities that have invested in equity markets.
This time last year my theme was uncertainty - apt given what has happened. I said I expected there to be market oscillations and an opportunity to invest cash; that came in the first quarter, when markets fell by more than 10 per cent in just two weeks. When considering where to invest, I talked about how some areas of the market looked expensive (the so-called "quality" stocks) and pointed to the cheaper, more cyclical areas. And we have seen considerable market rotation, with these cyclical sectors starting to outperform. My final piece of advice for 2016 was to avoid the potholes, and we've done that through diversifying the investments, a theme I think will continue. So not a bad year for predictions, as long as I stayed away from politics.
But I'm afraid I won't be able to avoid politics in 2017, because political uncertainty is likely to heavily influence investment markets. For the UK economy and sterling, the Brexit negotiations will be a key determinant of sentiment and direction. For global markets, the Trump presidency will be the source of much analysis. The initial expectation that his policies will be pro-business have supported the US equity market and dollar, raising short-term US growth and inflation forecasts. His position on international trade is less clear, with the protectionist campaign rhetoric leading to concerns for those exporting goods to the US. The anti-establishment theme could spread from the UK and US to provide Europe with some political shocks this year, with elections scheduled in the Netherlands, France and Germany.
So we live in uncertain times, but I would point to two important shifts that might help us decide how to invest our assets in 2017. The first is a move by governments and central banks away from monetary stimulus (supporting growth by keeping interest rates low and printing money) towards fiscal stimulus (spending more). Having printed almost $12 trillion since the financial crisis and with rates at historical low levels, there isn't much more to be done. To put that figure into context, $12 trillion would buy you almost a third of the global equity market. So we'll see more government spending, which is likely to lead to the second shift, higher inflation.
Inflation is not good news for charities holding on to cash or for bond markets, so I'd avoid having too much exposure to conventional bonds in portfolios and take opportunities to invest excess cash. There is an unusually wide range of economic forecasts for the next few years, reflecting our cloudy crystal balls. I expect this uncertainty to trigger volatility in equity markets and would favour active management to take advantage of the opportunities these oscillations throw up. Political risk suggests diversification is a good idea, both by asset class and by approach. It won't all be plain sailing, but I believe that a long-term perspective focused on fundamental analysis is the best way to weather the passing storms.
Kate Rogers is head of policy at Cazenove Charities