Market Outlook 2017: Where To Invest – And What To Avoid – In The New Year

Where to Invest – and What to Avoid – in the New Year

As we head into 2017, markets are still rallying on the back of Donald Trump’s unlikely ascendance to the White House.

But, as with most rallies, the rising tide is not going to lift all boats; some will remain in choppy seas for the foreseeable future, while others will sink to the bottom.

While markets seem to favor a Trump presidency, there’s still plenty of uncertainty that’s giving investors pause.

Today, I’ll show you what I see coming down over the horizon as we approach 2017. I’ll show you which sectors are going to continue to benefit in the Donald Trump era, and which will be lost at sea.

Before I tell you which sectors are going to be good to your money, I want to make sure you know where not to invest.

So let’s get started by talking about what investments you should steer clear of in 2017… unless you want to make a couple of speculative bets that could make you a bundle.

Avoid These Investments at All Costs

China

While the full year numbers have yet to be tallied, economists expect China’s economy to have grown by 6.7% in 2016, down from 6.9% in 2015.

I expect 2017 to be even worse, with the growth rate falling to at most 6.5%.

If that number sounds familiar, it’s because it is the lowest that President Xi Jinping has said the ruling party will tolerate, as it must stay at or above 6.5% in order to achieve the country’s stated goal of doubling GDP and per capita income from 2010-2020.

The Chinese yuan is already suffering thanks to the election of Donald Trump. And the specter of the Federal Reserve continuing to raise interest rates is pushing safety buyers into the dollar.

This has led to massive capital outflows from China and intervention from the country’s central bank.

China’s current housing boom is actually a bubble that’s ready to pop at any moment. And the government can’t spend its way back to double-digit growth numbers (for lots of reasons – chiefly, there’s a long list of interventionist policies from 2015 that haven’t seen the light of day as of yet, and probably won’t thanks to turnover in local party leadership positions in the coming year).

This will continue in 2017. Stay out of China (unless you want to go short – more on that below) at all costs.

Additionally, there’s a good chance President-elect trump will kill TPP. Some analysts worry that will turn Asia towards China and away from the U.S.

But that argument doesn’t fly.

The emerging markets economies in Asia and hard-charging Asian economies that aren’t technically emerging (because they’re already players on the world stage) would gladly fall in with China on trade deals, but that’s not going to help them if China falters further.

In fact, they are already so dependent on China, they’re increasingly looking to the U.S. for trade deals. They’ll negotiate them separately with the U.S., which is what President-elect Trump would rather do as opposed to let TPP benefit multinational corporations in Asia and disadvantage American workers.

Killing TPP will be a plus for American workers and strengthen manufacturing growth here at home.

Speculative Short Play

The best way to play China’s decline is to buy ProShares UltraShort FTSE China 50 (NYSEArca:FXP), a leveraged ETF that seeks two times the inverse (-2x) of the daily performance of the FTSE China 50 Index.

Keep in mind that the leverage that allows for greater returns will also contribute to tracking errors with the benchmark; the longer you hold it, the less likely your returns will correspond to the index.

That means it pays to pick your entry point carefully.

Good news is, FXP is just a shade above its 52-week low, trading around $32. Any negative news out of China could send this inverse ETF into the stratosphere.

I recommend buying FXP at market and using a 20% stop.

Emerging Markets

There’s some chatter out there that 2017 will see a rebound in emerging markets… but don’t believe the hype.

First, if history tells us anything, picking the next big emerging market is like drafting professional athletes – there’s all this untapped potential, but whether they’re successful depends on a number of factors that are out of our control.

Remember the BRICs?

Brazil’s battling a shrinking economy and political turmoil following the impeachment of former President Dilma Rousseff.

Russia’s economy is in shambles thanks to Western sanctions following its invasion of the Crimean Peninsula

The cash crisis in India – the result of Prime Minister Narendra Modi’s ban of the country’s 500 and 1,000 rupee notes – has ground commerce to a halt and is threatening its economic boom.

China, formerly the 800 pound gorilla of emerging markets, isn’t running full bore any more. China’s once-extraordinary, almost other-worldly impressive growth numbers continue to slide – and that’s just the beginning.

One elephant in the room for emerging market success is – like most other things – the election of Donald Trump. During the campaign, Mr. Trump promised to rip up various trade deals if the terms were unfavorable to American interests. Being effectively locked out of the American marketplace will cost these emerging economies serious dollars.

The other elephant in the room is rising “populism” across the globe.

Europe is seeing the rise of populists pushing back on the “Union” and state control by Brussels. One populist issue – the destiny of state banks – is a tough nut to crack – they need the backing of the European Central Bank, which leans on all member countries for its legitimacy, and is the only reason big banks across Europe aren’t imploding along with the euro.

At the same time, they want to break free of the euro and be able to devalue their own currencies to become more competitive on the world stage, which would help them export their way out of high unemployment and high structural debt.

If you don’t see where that leads, or what that means for emerging markets, I have two words for you: Currency wars.

If Europe implodes and countries fall back on their own currencies, there will be currency wars, globally. Emerging markets economies will falter first and fall the hardest.

Capital flight out of emerging markets has always been a problem. Back in August 2015, we all saw how quick – and how devastating – it can be.

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Disclosure: None.

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