DIY Investor Magazine
/
Jan 2017
29
UK INTEREST RATES ARE EXPECTED TO REMAIN FLAT
THROUGHOUT 2017 DESPITE INFLATION CAUSED BY THE
DROP IN STERLING;
As interest rates rise in response to inflation, bond
prices will generally fall; in contrast, equities usually
match rises in inflation through the businesses to which
they relate being able to raise prices and maintain or
increase dividends.
With interest rates being kept low, the search for
investment income has become more complicated in
2016 as investors have had to reassure themselves
that corporate earnings can support sometimes quite
generous pay-out levels, particularly in the oil and gas
sector.
Companies with large pension liabilities have had to
adjust their dividend policy to address funding gaps.
‘investors can afford to be patient for share prices to
recover’
In the commodities, iron ore prices are up 87%
reflecting continuing demand from China; oil prices have
been buffeted by endless speculation in 2016 about
OPEC’s production intentions but after achieving much
of the recovery in the first half of the year, the price for
Brent crude is closing the year a net 46% higher at $54
a barrel.
Copper closed the year 22% higher after a boost from
growing anticipated global demand since mid-October;
gold gained around 25% by mid-year on growing fears
about inflation, but slipped back to a 10% net gain for
the year ahead of the expected interest rate rises by the
Fed.
Mining produced the biggest risers, including FTSE’s
Anglo American (+300%) and Glencore (+200%) which
recovered strongly after being on the brink of insolvency
at the end of 2015. Oil & Gas shares were also among
the best gainers with FTSE 350 Index stock Tullow
(+93%).
Outlook for 2017
With a production deficit of around 600,000 barrels
per day predicted to emerge in the first half of 2017, oil
could see a further recovery to $65/70 in the coming
months.
The Fed made just one interest rate rise in 2016 from
0.5% to 0.75% because of economic uncertainties but
further rises are expected in 2017.
UK interest rates are expected to remain flat throughout
2017 despite inflation caused by the drop in Sterling;
Governor of the Bank of England, Mark Carney, will
continue in his role until June 2019 and he wants
monetary conditions to bolster confidence in the
economy during the period of the Brexit negotiations
even if the rate of CPI inflation – 1.2% in November –
eventually exceeds the Bank’s target rate of 2%.
‘President Trump’s economic policies are expected
to be inflationary’
Mr Trump has vowed to abandon the Trans-Pacific
Partnership (TPP) trade agreement on his first day in
office to the disappointment of the remaining eleven
participating countries, mainly in Asia, although China is
expected to exert further influence in the region.
The EU has faced significant challenges in 2016
including huge inflows of refugees and economic
migrants which have brought with them mixed political
and economic implications and the perceived threat
from Russia.
Donald J – The ‘Hair Apparent’
