2017 may be tough, investors must stay cautious

Rajiv GoelBombay Capital Services2016 had several firsts – whether a demonetisation back home, a Donald Trump victory, a historic OPEC – NOPEC deal, a Fed hike and a Brexit vote turned to Bremain. All of the above and more led to extreme volatility in asset classes but the stand out performer year to date remains the King Dollar.It is this asset class that has dictated the poor performance of gold, no longer safe haven, bonds and emerging markets versus the extreme animal spirits in the US equity markets via the USD/JPY as an indicator of high appetite for risk . There are many catalysts in the run up for the dollar be it the Fed’s desire to normalise interest rates or Trumps hyper-inflationary spend plans for 2017 or the emerging bear market in bonds.So where to for 2017? Goldman Sachs put out their bellwether macro theme for the coming year, “Valuation levels for equities and especially bonds remain highly elevated by historical standards, so expected returns appear to be low across most asset classes”. The long and short of it, it will be difficult to make money in 2017. That should not be a surprise, given that in 2016 most fund managers have no clue on how to deal with a bear market in bonds.Our two cents going forward, animal spirits will continue to chase US equities higher and the USD as US companies will take advantage of Mr. Trump’s new tax policies and reflection thrust. That corresponds to a 2400 prediction on the S&P, a 105-107 prediction for the DXY (Dollar index) and in sync 128 for the USD/ Yen pair.If all of the above should materialize it puts enormous pressure on the US Bond market, gold and Emerging markets in 2017. Throw in protectionist fights from China who will continue to squeeze the trade war via steady depreciation in the CNY (Renminbi) to 8.48 from the CMP 6.93 and you are staring at a 72+ tick on the Indian Rupee. A rising rupee and slow growth implies rising bond yields. We believe that the US bond market will be center stage in 2017, and will be the primary driver of markets across the globe. Based on the first signs, rising interest rates in the US will negatively impact gold, positively influence the dollar and financial stocks (banking stocks, insurances, etc) for the first half of 2017. In the second half bonds will retrace mildly, rates will rise moderately, stocks will do well as the sentiment will still be “risk on” but only moderate.Since one of the important drivers of emerging markets stocks is the US dollar, for 2017, our Nifty forecast really depends on what the dollar will do at current price levels.  Technicals reveal a long term pattern with first support at 7500 points. The other important price level is 8000 which is a 50% retracement of the 2016 bull-run. Our outlook for the Nifty is that it will start 2017 in a bearish way and from there on I leave it to you, dear reader, to calculate how much Narendra Modi’s 2% GDP   ‘cash-tration’ squeeze coupled with a depreciating rupee will weigh down the Nifty below 7500.As for my grandmothers favourite asset class, gold, I hate to be the bearer of bad news but 2017 may end up being the year gold producers and miners hate. The good news is for your wife - at every dip sub $1050 she will goad you that it is a fill, shut and forget opportunity. And as always, she will be the boss!Wishing you and your loved ones a happy and prosperous 2017 with a lesson for 2017 - remain uber-cautious as in uncertain times markets tend to drift, not to race.