2016 will leave its mark as the year geo-political changes shaped the future of financial markets for the coming year and potentially beyond.

Markets have rallied in the past couple of weeks, mainly at the detriment of the higher rated Investment Grade (IG) fixed income securities as investors factor in increased inflation expectations, growth and the potential eventual tapering of global monetary policy measures. 

The election of Donald Trump has triggered positive responses across financial markets, albeit at the detriment of IG fixed income yields. Investor focus has shifted more and more away from central bank policies over recent weeks, as the prospects for growth recovery under a Trump presidency has had markets react optimistically to the president elect’s proposed fiscal spending measures.

IG bond yields have in fact retreated higher, with larger drops seen in longer duration investment grade issues. Bonds are prone to retreat when Investor’s take a risk-on approach on expectations of a positive economic outlook.

Whilst the global high yield bond space remains relatively robust so far, investment options are more likely to entail a bond picking approach for the time being rather than a sectoral allocation.

The energy crisis has left many companies in the U.S energy sector relatively undervalued on the back of going-concern uncertainties due to persistently low oil prices since 2014, with oil core to their business operations. Now that an energy production deal has been met by OPEC, markets have been quick to identify and pick certain names in the U.S energy space with positive financials to benefit from an uptick in oil prices.

As the year draws to an end, risky assets could be expected to sell-off, but should not be a cause for concern as profit taking by investors is a custom habit to close off a financial year ahead of earnings season and the new year. But December so far has seen risky assets rally further.

2017 will bring continued uncertainty and volatility, though growth optimism is now added to that list as inflation expectations are on the rise. Geo-political events, European presidential elections, Trump’s inauguration and Brexit negotiations will be interesting to follow, as the volatility these factors craft will almost certainly bring with it valuation opportunities in the fixed income space, notably within high yield.

Europe itself has the potential to rediscover growth and higher inflation, supported by the surprise scale back by the ECB in the most recent central bank policy meeting.

Though as the Italian banking sector continues to find itself in turmoil, following the potential collapse of Banco Monte dei Paschi di Siena (the situation is rather fluid), investors will be hoping economic data in the final month of the year will be positive enough to shift focus off Italy’s banking crisis and support the recent ECB decision.

Though should it fail to do so and the Italian government fails to come to the rescue and meet the 5 billion euros of equity capital the bank seeks to stay afloat, then Europe could find itself falling back into stagnation if not recession as French presidential elections, a potential banking sector collapse in Italy, continued weakness in European peripheral economies and the triggering of the Brexit process, provide little support to Germany, Europe’s leading economy, in meeting the Eurozone’s inflation and growth targets.

Hence, should you have made a healthy profit in 2016, cashing out and treating yourself to a nice Christmas present may not be the worst of options, at least until a rebalancing strategy and new investment allocations are considered to prepare yourself for what 2017 has to bring.

This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.