Continuing from last week, I consider the factors that will influence the share market in the year ahead and provide Wilson Asset Managementā€™s next five predictions for Australian equities in 2017.

6. Yield trade fades
With interest rates at record lows for many years, investors abandoned term deposits and went on the hunt for yield among stocks with high, reliable dividends such as REITs, banks and infrastructure companies. However, with interest rates on the rise the yield trade will continue to recede in our view.

7. Aussie dollar to strengthen
The value of the Australian dollar fluctuated in 2016 trading as low as 68 cents against the greenback and is currently fetching around USD75 cents. Unlike most commentators, we anticipate the Aussie dollar will strengthen as the resources sector improves and interest rates rise. Currency fluctuations always give rise to winners and losers with a stronger Australian dollar an obvious boon for import businesses, while a disadvantage for local tourism operators.

8. IPO pipeline weak
We expect the pipeline of new companies coming to market will continue to wane this year given private equity firms have now sold off the majority of their assets and have transitioned to acquisition mode. The quality of businesses listed in recent months has generally been poorer than one to two years ago with many new companies failing to trade above their issue price, and some trading considerably lower. Traditionally, the quality of new IPOs is generally highest at the start of the bull market cycle and, as we near the end of the current cycle, the quality of new company floats is generally diminishing.

9. Large caps to outperform small caps
After a spectacular rally by small cap stocks in recent years, we expect large companies will outperform their smaller counterparts in 2017. The strength of small-cap stocks started to wane as valuations reached unsustainably high levels and there is not the earnings per share to justify the high PE multiples smaller companies are currently trading on. Notably, over the last few months small-caps have significantly underperformed relative to large-caps.

10. Global reflation
With the global economic recovery gathering pace, Credit Suisse analysts predict global nominal GDP will increase by 6.8% this year (2016: 5.6%), the fastest rate in six years. With some of President-elect Donald Trumpā€™s policies predicted to have a stimulatory impact, the low inflation era is likely drawing to a close. The large rally in bond yields recently is a clear indication of this.

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