What could be the big surprises in the year 2017?

The year 2016 began with carnage across world markets but actually ended on a positive note. Year 2017 may not be that predictable. There are a lot of assumptions that are built into most of our projections for 2017. Here is a look at 8 such potential surprises in 2017. Some are global, some are local and some may even appear far-fetched. But to be on the safer side, don’t write off any of these possibilities.

 

EU emerges stronger during 2017…

 

Ask any casual observer and the typical reaction will be that EU and the common currency (Euro) could come into question during the coming year. The reasons are not far to seek. We are seeing the rise of the far right in France and Germany. Greece and Italy are deep in economic problems and are keen to extricate themselves from the Euro. The reality could be something entirely different. The PIGS nations will probably realize during the year that their economic problems are not due to the Euro but due to their own economic mismanagement. If Merkel manages to get another term in Germany and if France’s Marine Le Pen gets marginalized then the entire anti-establishment logic may go for a toss. Countries will increasingly prefer the safety and security of the EU umbrella than being left alone! Year 2017 could be when the wind could decisively blow in favour of the EU remaining united.

 

US Equities could underperform in 2017…

 

At this point it looks hard to conceive as US equities have been the star performers with the DJIA and the NASDAQ at all-time high levels. But if the US Fed goes ahead and hikes rates aggressively thrice in 2017, then the dollar could strengthen substantially. This will sharply bring down the profitability of US companies with global operations. Since a chunk of the US corporate profits come from global operations, you could see the overall profitability of the NASDAQ and DJIA companies hit badly. This may sound surprising but it is perfectly possible that the US markets could underperform.

 

Currency war in the offing across EMs…

 

This will be a direct outcome of the strengthening US dollar. With the Chinese Yuan weakening versus the dollar, the PBOC may allow a sharp weakening of the Yuan. This may force a lot of commodity driven economies that export to China to also drop their currencies in tandem to keep their exports to China competitive. When China and a host of commodity driven economies get involved, the currency war could actually pull most of the key economies into the war. During the year, we could a large number of economies trying to compete in pulling their currencies down. The net result may be value destruction across the board.

 

Gold could see a surprise rally…

 

Gold normally trades counter to the US dollar. Year 2017 may offer a unique situation when the dollar may remain strong but gold may see demand coming in. The demand for gold could come from 3 sources. Firstly, continued monetary expansion could enhance demand for gold. Secondly, Trump’s policies could lead to political risk across the world and create demand for gold. We may see asset managers preferring gold as an asset class in the midst of an uncertain global environment.

 

Britain may choose to abandon BREXIT…

 

Going against the popular vote may sound undemocratic but the referendum, anyways, does not have any legal sanction. The parliament can always vote to stay on in the Euro. Firstly, it is possible that Theresa May will realize that the cost of giving up EU membership far outweigh the benefits. Secondly, oil-rich Scotland has already threatened to secede from Britain if it abandons the EU. That could be a compelling reason for staying on in the EU. Lastly, with a current account deficit (CAD) in excess of 5.5%, UK will have little choice other than to stay on in the Euro and enjoy the benefits of the common market and its unique position as the gateway to Europe. Don’t be surprised if BREXIT ends with a whimper during the year.

 

Modi undertakes Round 2 of demonetization…

 

Year 2017 could mark the beginning of Round 2 of demonetization. There are a variety of possibilities. We could see another round of demonetization of high value currencies. We could also see the logical next steps to demonetization. The government may go aggressive on flushing out the black money held in gold. The Benami Properties Act will also be rigorously enforced to flush out black money held in real estate assets. The entire process will surely create pain in the economy but will be pursued rigorously.

 

Oil prices could shoot up in 2017…

 

It is hard to conceive what could move up oil prices sharply in 2017. We believe that the big move against alternate fuels could be the reason. One of the cores of Trump’s energy policy is reducing the accent on alternate fuels and giving a push to shale drilling across the US. Many of the benefits enjoyed by alternate fuels could be withdrawn. This will revive demand for fossil fuels and prices of oil are likely to move up. Whether it will end up at $70 or $80 will be hard to predict. But if Trump seriously moves away from alternate fuels, then fossil fuel prices could enjoy a joy ride in 2017.

 

RBI hikes interest rates in 2017…

 

From a very rational perspective that may sound hard to digest. But consider two different scenarios. Firstly, if the oil prices move up and inflation starts shooting up in India then the RBI may have little incentive to cut rates. More so if the government is still pursuing demonetization and banks are flush with liquidity. It is also possible that 3 rounds of Fed rate hikes may lead to a sharp surge in capital outflows out of India. This may induce the RBI to hike repo rates to maintain the yield differential. As much as it sounds remote at this point of time, we would not exclude the possibility of a RBI rate hike in 2017.