2016 has been a year of political surprises in the United Kingdom and the United States. The UK voted to leave the European Union in a referendum on 23 June and Donald Trump won the US presidential election on 9 November.
Financial markets were totally wrong-footed in both instances and everything seemed to plunge in the immediate aftermath. Yet there was also a quick turnaround, which was equally unexpected.
The Straits Times Index (STI) ended the year nearly flat or just 0.07% lower at 2,881, which is quite remarkable considering all the bad news it has been hit with throughout the year.
Exactly a year ago, I had predicted that despite the challenging economic outlook, the downside for the STI would be limited due to its attractive valuation.
For 2017, the main risk for global financial markets is, in my opinion, souring international relations, especially between the US and China.
The fragile global economy can little afford its two biggest economies engaged in diplomatic, trade or even armed conflicts. In spite of this, there are still reasons for the STI to perform better.
Improving macroeconomic environment
First of all, the global macroeconomic picture is generally better. Going by official GDP data, China has been able to avoid a hard landing thus far, growing at about 6.5%.
The US economy continues to improve, so much so that the Fed is now projecting to raise interest rates three times instead of twice in 2017.
Commodity prices have recovered significantly from their lows in early 2016. Oil prices are currently hovering at above US$53/barrel, 70% higher than its lowest price level of about US$30/barrel.