Expect US inflation, China growth next year

A shopping mall in Washington, DC. Investment giant BlackRock says in its annual outlook report that reflation - rising nominal growth, wages and inflation - in the United States will be one of the key market themes to note next year. It also expects
A shopping mall in Washington, DC. Investment giant BlackRock says in its annual outlook report that reflation - rising nominal growth, wages and inflation - in the United States will be one of the key market themes to note next year. It also expects growth in China to be resilient.PHOTO: AGENCE FRANCE-PRESSE

The global outlook for next year will be a mixed picture with inflation firming up in the US, resilient growth in China but political risks threatening to disrupt markets.

Investment giant BlackRock noted in its annual outlook report yesterday that equities may prove more rewarding than fixed-income investments amid higher inflation and better corporate earnings.

Reflation - rising nominal growth, wages and inflation - in the United States will be one of the key market themes to note next year.

"A tighter US labour market is pushing up average hourly earnings at the fastest pace since 2009, and we expect core inflation to increase on the back of rising services inflation. We see this giving the US Federal Reserve the confidence to raise interest rates further in 2017."

Eliminating deflation or persistently low inflation is a common benchmark for economic recovery and a precondition for higher interest rates. Conversely, rising inflation will usually squeeze bond prices.

"We prefer stocks over government bonds globally in the reflationary environment. Asian equities have the additional attraction of an earnings recovery after five years of stagnation," BlackRock added, naming India, Indonesia and China among the regional markets it likes.

TURNING POINT

We believe 2017 could prove to be a turning point for the Asian equity universe, particularly if China's gradual economic rebound presents positive knock-on effects for other regional economies

MR RONALD CHAN, chief investment officer of Asia ex-Japan equities at Manulife Asset Management.

The ability of regional economies to reform the financial sector and rising current account surpluses - a sign of fiscal health - remains encouraging, the report said.

In China, the government is expected to roll out more support measures next year before President Xi Jinping consolidates power at the Communist Party's national party congress, BlackRock said.

Mr Ronald Chan, chief investment officer of Asia ex-Japan equities at Manulife Asset Management, concurred.

"We believe 2017 could prove to be a turning point for the Asian equity universe, particularly if China's gradual economic rebound presents positive knock-on effects for other regional economies," Mr Chan said in Manulife's outlook report, also released yesterday.

"As the economic outlook brightens, valuations are also expected to improve, which could offer significant gains for investors. At Manulife, we see constructive opportunities in Indonesia, China and India equities," he added.

This may in turn set the scene for the Singapore market to take its cue from global catalysts and rebound from this year's doldrums. Manulife believes Singapore companies' weak earnings will soon bottom out while valuations are still inexpensive compared with historical levels.

However, 2017 will also be dotted with political risks that may have a big impact on the global markets.

"The Trump administration's policies on trade and security remain question marks. Elections in the Netherlands, France and Germany will show to what extent populist forces hostile to the European Union and euro are gaining sway," BlackRock warned.

Potential political frictions may lead to trade conflicts, which may dampen the growth outlook in emerging markets.

A version of this article appeared in the print edition of The Straits Times on December 15, 2016, with the headline 'Expect US inflation, China growth next year'. Print Edition | Subscribe