Investment firm Brooks Macdonald’s head of research Richard Larner outlines the firm’s predictions for 2017.

FTSE

Improving global growth prospects should benefit the FTSE 100 Index’s multinational constituents, although we are conscious that their valuations have already been strongly supported by a weaker sterling. If sterling were to appreciate against the major trading currencies (the US Dollar and euro), perhaps due to either interest rate expectations changing or because of perceptions that the risk of a ‘hard Brexit’ has reduced, the FTSE 100 Index could underperform. Longer-term uncertainty surrounding the UK’s secession from the EU may weigh on the more domestically-focused FTSE 250 Index, although we note the strong earnings growth of many areas of that market. Overall, we believe expectations of higher fiscal spending and looser financial conditions post Brexit should benefit FTSE 250 companies more than the large global companies in the FTSE 100 Index.

The pound

We expect the pound to remain under pressure against the dollar in 2017 as markets continue to price in greater US fiscal spending, as well as higher US growth, inflation and interest rate expectations. At the same time, the UK’s political backdrop is uncertain given the result of its European Union vote, as is the impact of the UK’s secession on its economic growth (and the path of the Bank of England’s base interest rate). Amid the global rise in populist politics, we view eurozone countries as those which will have the biggest difficultly in adapting; this adds material risk to the euro. As a result we expect sterling to continue to show weakness versus the US dollar, but we can see the possibility of it strengthening against the euro if populism continues to gain momentum on the Continent.

Oil

Although the Organisation of Petroleum Exporting Countries has recently pledged to reduce its oil production to support the oil price, the cartel represents a smaller proportion of global production that it has done in past decades. US shale oil producers will be able to ramp up their own production if prices rise above their marginal cost of production (which we estimate to be in the region of $50-$60); this should keep prices range bound in the medium term. On the other hand, rising global oil demand will provide some support and if prices return to their 2016 lows; this could represent a buying opportunity for longer-term investors if it occurs.