High volatility + low returns = the 'new normal'

IT might appear a contradiction but for financial markets, 2017 looks very much like it will be a year of high volatility and low returns. High volatility because of uncertainty over US economic policy under Donald Trump's administration together with rising geopolitical risk in Europe and the Middle East, low returns because the very real prospect of faster-than-expected US interest rate hikes amid a slowing global economy will cap the upside for many asset classes.

This then is the "new normal'' to which investors will have to adapt, one consequence of which will be a greater need for active management. In fact, investment professionals already acknowledge this - at the end of 2016, Natixis Global Asset Management surveyed decision makers at 500 institutional investment firms around the world on their market outlook and asset allocation plans for 2017 and beyond, with 73 per cent responding that the current market environment favours active management and 78 per cent saying they are prepared to pay higher fees for outperformance.

The greatest source of uncertainty comes from the US because of incoming president Trump's "America first" election promises that include heavily taxing imports, particularly from China. With conventional trade flows already weakening over the past few years, the introduction of significant impediments such as high tariffs can only further stifle global growth. To what extent it is not yet known, but markets are bracing themselves for a protectionist America, perhaps starting a trade war in 2017 with China.