Boom or bust: What will 2017 bring for markets and the economy?

After a depressing 2016, will 2017 be any better? Will the economy and the stock market get mired in Brexit blues, or can they shrug off the uncertainty?

Will the Trump bump in share prices carry on, or will the President-elect’s unpredictability spell trouble ahead? And what about the rest the world, with political instability almost everywhere you care to look?

I asked a group of experts from the City to look into their crystal balls and make some predictions for the year ahead. Below are their responses, along with my assessment. There are a couple of stockbrokers in there, a representative from a spread-betting company, a fund manager and a personal finance guru. Among their number is at least one acknowledged Brexiteer too, as well as at least one rabid Remainer (me).

After the shocks and surprises of the last year, and the potential for more, it’s no easy task, so our thanks to all those who took part. Each of our oracles has come up with a prediction for the FTSE 100, and a share tip. It speaks volumes that nearly 1,000 points separate the most optimistic and pessimistic forecasts.

The FTSE has been sustained by the weak pound, the fact that it’s dominated by international companies that make most of their money outside of the UK, and the strength of Wall Street. This won’t last. I expect to see a correction of some description by the spring followed by a slow summer before the market regains some poise at the end of 2017. Opec’s production cut and similar action by others should hold for most of the year, keeping oil prices steady, if not buoyant.

The UK Government will continue to borrow ahead of its targets. Inflation will be sufficient for the Bank of England to contemplate at least one rise in interest rates leading to more tension with ministers.

The Office for Budgetary Responsibility’s forecasts, criticised for being overly pessimistic by Brexiteers, will actually prove to be overly optimistic. The economy as a whole will be sluggish. Consumer confidence has helped sustain it up until now, but instability and inflation will start to eat into that.

The excitement on Wall Street about the prospect of Trump tax cuts and other measures to stimulate the economy will be tempered as a man hopelessly unsuited to the office is faced with the hard realities of trying to govern. There will be at least one nasty election result on the continent, as the populist earthquake that brought us Brexit and Trump slows but doesn’t stop.

FTSE 100 forecast: The market will ultimately finish little changed on the year. I’m going for 7,100.

Stock tip: Balfour Beatty. CEO Leo Quinn described the business as an ice berg at the interim results stage. He said the numbers (losses were reduced) only reflected 10 per cent of what’s going on with the business. With infrastructure spending supposedly all the rage on both sides of the Atlantic, I’m taking Mr Quinn at his word and predict that next year will show more evidence of a turnaround from this contractor. It’s worth noting that the boss and his wife invested quite a lot of money in the shares during 2016.

2016 will go down as a year when seemingly everything defied prediction. Having been burnt by several big events this year, investors should watch political developments in Europe, namely elections in the Netherlands, France and Germany.

It is possible that the “populist” earthquake of Brexit and Trump could be replicated on the continent, with serious implications for the stability of the euro, the EU and financial markets. We can only hope that the pollsters prove more accurate in 2017 than they did in 2016. The US Federal Reserve’s plan to hike rates three times in the coming year lays out how differentials in central bank policy, which will become more and more apparent. The European Central Bank will continue to ease further, while the Bank of England may actually have to contemplate higher rates if UK inflation picks up.

Having ended the year on a high, stock markets will perhaps be due an early correction in January. Much of the rally since early November was built on the expectation of a Trump stimulus programme, rather than the reality.

At some point, details will emerge, but if the market deems the effort to be insufficient we may be facing a choppy few months. It is also going to be a year of watching the US dollar – expectations of higher US rates could mean that the late 2016 bounce in the greenback will gather pace, with serious implications for US companies, and for commodity prices.

Much of the FTSE 100’s improvement over the year was driven by the commodity rebound, and then by sterling weakness that drove investors to buy shares in big international firms that would benefit. With commodity prices looking weaker thanks to a rising dollar, and the pound likely to stabilise around current levels, perhaps the coming few months will be a bit more difficult.

FTSE 100 forecast: The index may well move above its 2016 high of 7,134, and push on towards 7,500.

Stock tip: 2016 was a year when contrarian stock picks did well. With this in mind, I think house builders could be due an improvement, and for this we could do worse than pick Persimmon. A healthy history of special dividends, plus a solid land bank and strong demand for houses, plus a remarkably undemanding forward earnings multiple of 9, makes the shares appeal.

Next year promises to offer further potential political risk events for investors to navigate. The known unknowns include, for example, elections in Europe (including Germany, the Netherlands and France), the realities of a Trump presidency and the start of Brexit negotiations.

The lesson of 2016 is to remember that political risk is not all negative for markets, especially if it is seen to accelerate the inevitable shift in emphasis from monetary to fiscal policy. Perhaps the only certainty is that uncertainty leads to market volatility and the path towards our forecast of 7,750 will not be all plain sailing.

Valuation change and earnings growth may exert opposing forces upon the market in 2017.

Typically the price to earnings multiple of equities contracts in periods of monetary tightening, (rising interest rates) by the US Federal Reserve. However, there are two reasons to remain positive.

First, bond yields are rising from a very low base and down at these levels, share prices and bond yields tend to be positively correlated.

Second, earnings per share are set to grow for the first time in five years. We are usually cautious of optimistic growth forecasts at the start of the year. However, higher commodity prices, less pressure on the profits of financial companies and positive foreign exchange translation give us more confidence that, this time, the profit cycle is turning.

FTSE 100 forecast: 7750

Stock tip: Paddy Power Betfair has underperformed the FTSE 100 since its merger, perhaps proving the old adage that “it is better to travel than arrive”. However, the valuation is now very attractive and the growth story is far from over with 20 per cent plus forecast in 2017. We think PPB can even exceed those expectations as it delivers on merger synergies, continues to take market share and demonstrates operational gearing in turning sales growth into earnings.

In 2017 the UK economy is likely to do much better than many expect. This will be aided by the significant easing in UK financial conditions seen this year, namely the fall in sterling. It will boost exporters.

The Bank of England, currently forecasting economic growth of 1.4 per cent in 2017, will have to revise its view higher as the year progresses to nearer 2 per cent, and maybe higher still. Inflation is also unlikely to be as big an issue as many fear. Of course, the price of imported goods will rise as sterling is lower, but a significant amount of the pain is likely to be taken by retailers accepting reduced margins – both on the high street and supermarkets – as competition remains extremely fierce.

So, price rises may not be passed on to the consumer. Oil prices are likely to move in the $65-$70 a barrel area, as Saudi Arabia enforces Opec production cuts ahead of the listing of its state-owned oil company, Aramco, in 2018.

FTSE 100 forecast: The FTSE is likely to reach 7,400 by the year end, boosted by better global growth, a resilient UK economy and rising oil prices.

Stock tip: Kier Group: Kier group is well placed to benefit from the expected increase in UK infrastructure spending over the next few years. Its strong focus on road building and maintenance means it is exposed the early part of such spending, as larger projects take a long time to plan and there are few “shovel ready” projects. There are some concerns over the level of debt, but it is covered by development property and house-building assets.

2017 may prove to be an even more challenging year for equities thanks to a greater slew of economic and political imponderables than usual.

Global growth rates are questionable as is the quality of corporate earnings. Oil prices are unlikely to drift much below the $50 threshold thanks to somewhat tenuous Opec and non-Opec restrictions on production. “Trumpitis” could well have positive effects on the US economy driving up growth above 2 per cent thanks to infrastructure spending and taxation cuts, though there is a concern that repatriated corporate funds, squirreled away for so many years, could well find their way in to shareholders pockets rather than wage increases. Bank shares have already blazed the trail during this last quarter.

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Many are of the opinion that US markets could make a quantum leap in the first quarter, despite the threat of three hikes in FED rates in 2017 and no doubt Dollar earnings in FTSE 100 companies could be positive, but Brexit negotiations could get very acrid, confrontational and illogically unpleasant. The possibility of arrogance on both sides could well damage their respective economies.

Also inflation seems to be gaining momentum. Were it to go above 3 per cent in the UK, the effect could be negative for housing and consumer debt. Also, China’s woes should not be underestimated, particularly the questionable robustness of their banks.

Though I am comfortable with the US stock market, I think the FTSE will have trodden water by the end of 2017 at best. There will be more than just a little evidence of “dog in the manger syndrome” from our quasi friends in Brussels. They will almost certainly say the same about the UK.

FTSE 100 forecast: The FTSE will close at 6,750 at the end of 2017

Stock tip: My pick of the year is RPC Group, the largest plastic container manufacturer in Europe. I hope RPC will be in the FTSE by the end of 2017.

As we enter 2017 many economists are pretty negative on the prospects for the UK, and the only way to judge whether their forecasts prove to be on the money is to wait and see. However, the stock market is a very different beast to the UK economy and there are reasons to believe that it will remain well supported.

Interest rates are still low and show no signs of revival, a generation of baby boomers is retiring and looking for income, and many people are still sitting on cash waiting for a market fall to put their money to work, all of which provide a positive backdrop for shares.

The UK stock market is also very internationally diversified, so even if things to take a turn for the worse in the UK, the Footsie has other sources of revenue.

FTSE 100 forecast: This is really anyone’s guess so I’m just going to play the averages – the FTSE 100 returns about 5 per cent on average each year, not including dividends, so I’ll go for 5 per cent above its current level at 7,250

Stock tip: Auto Trader has evolved from a car buyer’s magazine to become the leading digital automotive marketplace. In years gone by, buyers had to view cars in person, but now browsing is increasingly done online. A strong online presence is therefore critical to a car dealer’s success, and Auto Trader has cornered the market. The group says it attracts around 48 million visits each month, an audience six times larger than its nearest competitor. With a weak pound and economic uncertainty threatening new car sales, the second hand market could pick up the slack.