A Santa Rally caps a year of surprises

Record highs, a Santa Rally, and manufacturing momentum

Shares were initially boosted by the prospect of a Trump-led fiscal stimulus package, but recent positive economic data then suggested a general pick-up in global growth. Investors and cliche-lovers alike were rewarded with a good old-fashioned Santa Rally: developed stock markets rose by 3-6% during December and added a further 2-4% year-to-date, with major indices in the US and UK repeatedly making record highs. Emerging markets and fixed interest bonds also made positive contributions.

The universally recognised Purchasing Manager surveys pointed to the strongest global manufacturing prospects in three years, supported in most cases by strong intentions in the service sector. In the UK, a buoyant service sector pointed to fourth-quarter economic growth consistent with pre-referendum levels, defying the gloomy expectations of a Brexit-driven slowdown.

Optimism tempered by lingering concerns

Years of deflation worries and the "lower rates for longer" mantra have given way to one of rising inflation and firmer interest rate expectations. One example is China, which for years stood accused of exporting deflation but now shows producer price inflation at over 5% year on year. The US apart, it is hard to see interest rate hikes in the developed world this year, but the mindset is changing. We feel, however, that markets have got a bit too carried away in the short term. We are not arguing with the more optimistic outlook, merely cautioning that concerns remain.

The UK remains emotionally divided over Brexit, and unfortunately that leaves both sides less prepared to view the economy dispassionately. Just like the drunk with the lamp-post, both sides use fresh economic data for support rather than illumination. As things stand, the Remain scaremongers have much egg on their faces; the Bank of England's chief economist even had the grace to admit this. But in reality, little has changed other than a markedly weaker currency. Ongoing growth has been driven, once again, by consumer spending rather than companies investing in future business expansion. Business uncertainty is likely to increase once Article 50 is triggered and protracted negotiations begin.

Regardless of their feelings for the man, investors have wholeheartedly bought into the Trump ideal of America First. The US dollar made a 14-year peak and shares hit record highs on the belief that Trump would deliver on his fiscal package and return jobs to the US. Our concerns are, firstly, that with the US already delivering steady growth Congress may decide to limit the level of stimulus and, secondly, that the benefits of fiscal measures take a matter of years to materialise. Will investors remain that patient?

Aside from these two major concerns, Europe has multiple elections throughout the year, China is teetering on a debt mountain, and we have no idea of the global ramifications of either a Trump-Putin alliance or a US-China trade war. On the positive side, interest rates will remain historically low, leading savers to still seek income-producing alternatives. With literally billions of pounds leaving UK equity funds during 2016, there is probably quite a chunk sitting on the sidelines waiting to be re-invested.