Interactive Investor

City sage offers help for investors in 2017

28th December 2016 12:18

David Buik from ii contributor

Investors face further political risk in 2017, should they be worried?

Whichever way you look at it, the European Union is looking increasingly brittle.

We had a close election in Austria, a resounding victory for 'no' in the Italian referendum - it wasn't a beating, it was a trouncing by nearly 19% - and we are heading towards April, when we know François Hollande will not be standing in the French presidential election.

François Fillon [centre-right Republican party] will have more than a little bit of bother from Marine Le Pen and there is a number of people who increasingly believe that the National Front - because France has a real immigration problem - will win that election. If that is the case, Europe is really under the cosh.

We also have the situation in Germany where Chancellor Merkel will be looking to be re-elected and, again, immigration is a real problem there.

So you could describe Europe as a melting pot, but that's not the only problems we have. We have a new, unknown, possibly loose cannon as the President of the United States.

We have no idea how he is going to approach foreign affairs, what his relationship is going to be like with Putin - there is a great big hand of friendship that seems to be going out, but that could be a poisoned chalice? We don't actually know.

Political issues facing investors in 2017 are probably greater than the economic onesThe situation in the Gulf remains very close to boiling over - Iran, Iraq, anywhere you seem to look - so that hasn't got a real answer to it.

Again, we have no idea what the relationship with China is going to be like, certainly president-elect Donald Trump is playing a dangerous game being very critical of the Chinese authorities before he has actually sat down at the desk in the Oval Office in the White House.

So, the political issues facing investors in 2017 are probably greater than the economic ones.

Do you see a Donald Trump presidency as a threat or an opportunity?

I think it is an opportunity, although he wouldn't be my first invitee to my dinner table on a Saturday night.

Take that aside, I think the types of things he will be able to get through Congress in the first two years are plausible; spending a trillion dollars on infrastructure and cutting corporation tax down from 35% to 15% over a two-year period.

But you have to remember that Trump has, in his own political party, as many enemies as he has got friends. So nothing is a nailed-on certainty when it comes to Congress. Congress has been a thorn in the Democrats' side now for eight years and I very well think it might be a thorn in President Trump's side as well.

So, the two main policies I think will provide an excellent opportunity and I hope, certainly in regards to the UK, that we grasp the nettle by looking for friends and, in particular, trading nations. We have a wonderful opportunity to set down our stall and attract the United States into our haven.

How can investors benefit?

I think 2017 is not going to be what we would describe as a tracker - don't follow the flow of the indices! You have to follow the flow of the sectors that you believe will make money and, therefore, if Mr Trump is going to offer up opportunities in the world of infrastructure, you have to look at the building companies, the big infrastructure companies, and oil companies.

Areas like tax cuts and infrastructure spending aree where investors will benefit mostThe fact that Mrs Clinton isn't going to be hammering away at the drug companies, there is an opportunity there. We had a pretty quiet time in some respects in 2016, some have done well but some have not done at all well, I think the pharmaceuticals sector is one we like and will do very well.

By really looking at these areas like the tax cuts and infrastructure spending, that's where investors are going to benefit the most. If you are interested in overseas, companies like Caterpillar [manufacturer of construction and mining equipment] will do extremely well.

We talked a year ago about a correction in 2016, are we in for another in 2017?

It's all down to the political improbable.

Here in the UK and Europe we face the really serious problem of negotiating, hopefully, a sensible Brexit where Europe doesn't damage itself and we don't damage ourselves. I think an awful lot of credence and importance should be attached to this.

We won't actually know until a couple of years from March of next year, but the menu will be done and we will be able to choose which morsels we think will be tasty. We need to make sure those morsels are tasty for both sides, it would be very silly for both sides to cut off their nose to spite their face.

With China, you never know because they manage to paper over the cracks brilliantlyThe other, of course, is the Trump presidency. We don't know what his reaction is going to be trade-wise towards China and also is China still in the situation where growth is not there?

The biggest problem from a financial perspective, without a doubt, is the robustness - or not - of the Chinese banks. They are ridiculously over-leant, particularly in the property area, and many of these property companies and huge tower blocks are empty. Unless there is an income to sustain these loans, I foresee problems.

With China, you never know because they manage to paper over the cracks brilliantly politically, but it is a real issue.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.