The coming year will see economic momentum build in the US, but investors should not rely solely on US assets according to J.P. Morgan global market strategist Kerry Craig.
Speaking at a media roundtable yesterday, Craig advised that investors should maintain a well-diversified portfolio to include an array of global assets.
"Inflation and consumer confidence are on the rise, but US assets have risks implicit in their valuations, and the direction of the incoming administration remains unclear," Craig said.
He advises investors who are looking to diversity to pay close attention to "parts of the market that are relatively cheap", in particular emerging market equities, and Eurozone equities.
One of the biggest unknowns for investors' in 2017 is how the US economy will shape up under the direction of the incoming administration.
While US President-elect Trump's policy agenda is still evolving to 'make America great again' he has publicly advocated for increased infrastructure spending, a reduction in corporate regulation, and tax cuts to boost economic growth. Craig predicts this will lead to overall economic momentum over the next few years.
However, Trump's avocation of protectionist trade policies, and the imposition of tougher restrictions on illegal immigrations, is a cause of concern for investors.
"Any large fiscal stimulus by a Trump administration at a time when the US economy is already running near-full employment would likely aggravate inflationary pressures," Craig said.
With president-elect Trump's inauguration nine days away, the market can only speculate what the Twitter-happy Trump will do in his first 100 days.
Broadly J.P. Morgan highlighted US dollar strength, the growth of treasury yields, and signs the return of inflation to central bank targets - which they acknowledge is "heating up but not ready to boil over."
With a view towards diversification, Craig directs investors to emerging markets, where growth has been aided by the rebound of commodity prices and a stable Chinese economy.
"China is experiencing a lot more stability, and the manufacturing and services we were worried about in 2016 are all heading back into positive territory. You also have key emerging markets like Russia and Brazil coming out of rescissions," Craig said.
In Europe, Craig predicts austerity will become "a phrase for the history books" as Eurozone governments elect for fiscal over monetary policy. However, Craig encourages investors to keep their eye on the political situation as the populations of Germany, France, the Netherlands and Italy go to the polls.
"The political risk is going to be ramped this year, especially in the Eurozone where we're going to see 50% of the population in Europe voting. The UK is going to have to figure out how it will divorce itself from the Euro this year. That all adds up to a lot of uncertainty," he said.
At home, Craig characterises Australia as "sailing in fairer winds." Despite a retraction of growth in the third quarter of 2016, he points to the strength of the mining sector and the housing market, and predicts an increase in spending from state and federal governments.
"An overall higher commodity price signals that big drags on the economy are starting to ease up, which is why we think in the coming year we will see more growth in the Australian economy."