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Looking back, 2016 will be remembered as a year that offered up plenty of twists and turns. When the UK voted to leave the European Union in June, it not only raised questions about the prospects for its own economy, but it also put the future of the EU into doubt. Meanwhile, the U.S. Federal Reserve’s move to raise interest rates marked a divergence in global central bank policy that will likely stoke market volatility as Canada, the UK, Europe and Japan keep further easing on the table.

At RBC Wealth Management, we see a number of key themes on the horizon that are likely to shape both the global economy and financial markets in 2017.

UK and European equities

The UK’s Brexit vote will likely be seen as a watershed moment for the EU, setting off a wave of voter discontent that will largely decide the shape of its future. Politics will continue to be key in 2017 as Europe faces a heavy slate of elections in the coming year. This leads us to believe investors should be braced for elevated political risks as European countries go to the polls. We believe investors need to be prepared for potentially higher volatility in equity markets and the implications of foreign exchange exposure. Our expectation is for a prolonged period of uncertainty that will likely take a toll on economic growth and could lead to bouts of heightened volatility.

In the UK, our preference is for companies in defensive sectors, such as consumer staples and pharmaceuticals, given the likelihood of a weaker pound and soft domestic demand. We are cautious on domestic sectors, such as retailers, which have historically suffered when the pound is weaker. In Europe, banks could benefit from low valuations and recent reports that the European Central Bank (ECB) may be pondering a change of direction, though recent weak lending data rein in our enthusiasm. With subdued economic growth, fair valuations and high political risk, we prefer well-capitalised, quality companies that have world-class franchises and pay and grow dividends.

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U.S. equities

Donald Trump’s dramatic victory in the U.S. presidential election will help shape U.S. equity market returns in early 2017 and possibly at other points throughout the year. Trump’s proposed policies, which include tax cuts and infrastructure spending, could provide a major boost to economic growth, at least in the first couple of years, although it is not the only factor that will drive stock markets. Prior to the election, the U.S. economy seemed likely to grow and stock markets were in a solid position to rise in 2017. A boost to economic growth from Trump’s proposed fiscal stimulus measures, in addition to rising corporate profits, should propel the market and help to deliver low double-digit total returns in 2017.

We favour the U.S. over developed markets in Europe and Asia, and believe that U.S. earnings growth is more durable and the economic prospects are better—more so if fiscal stimulus measures are passed. The biggest concern about the U.S. stock market is that it has become expensive following a strong bull run. Even so, this does not spell doom. Stronger economic growth combined with the end of disinflationary pressures and rising interest rates could push stock markets up higher still, causing valuations to rise to much more elevated levels. For 2017, we expect an extension of the bull market in the U.S., driven by somewhat faster economic growth and rising corporate profits.

Canadian equities

After five years of underperformance relative to its U.S. counterpart, the Canadian equity market limped into 2016 against a number of headwinds that included elevated household debt and a steep decline in oil prices. However, lower valuations and better-than-expected earnings helped the Canadian stock market outpace global equity indices in 2016.

Despite solid stock market growth in 2016, we believe that there is plenty of scope for continued performance in the coming year and that the conditions are in place to deliver attractive relative returns in energy and the financial sector. For this to bear fruit, there needs to be a continued rise in oil prices. We believe that lower non-OPEC production, decent demand growth, and limited OPEC spare capacity should drive prices higher in 2017. With the fallout from the energy downturn appearing to be fading, the Bank of Canada continuing to be accommodative of financial markets, and the federal government’s fiscal stimulus plan being primed to kick in, our expectation is for another year of solid equity returns.

Fixed income

Accommodative monetary policy is likely to remain in place in all the major economies in 2017, although we see it taking very different forms in the U.S., UK, Europe, and Canada. Ultra-low interest rates will remain the order of the day in Canada; however, the Federal Reserve is expected to move further into a hiking cycle already characterised by patience and a very gradual pace. The Bank of England (BoE) will have to weigh the risks of higher inflation, stemming from the steep decline in the pound, against the potential need for stimulus should Brexit-related developments unduly weaken confidence and economic output.

Meanwhile, the ECB may have to adjust its approach to accommodation given practical limits to its current bond-buying program. Overall, we believe global central bank policies will still best be described as accommodative. But 2017 will make clear that the look and feel of accommodation will be different in each region.

In bond markets, central bank policy and political upheaval will have an influence. In the U.S., we continue to favour corporate bonds, although we believe it is important to be selective. In the UK, we expect to see volatility in the gilt market as a response to any Brexit-related developments and any interest rate rises in the U.S. Finally, in Europe, we continue to have a preference for corporate bonds over government bonds.

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