For Europe in 2017, the big question is whether fragile economic growth and unprecedented central-bank stimulus will be overtaken by populist politics.
European equities could have a strong year if the antieuro populist candidates that have gained traction over 2016 fail to win elections, as polling suggests. But if populist candidates triumph in coming votes, the prospect of a eurozone breakup could return to markets.
Meanwhile, the world’s two most important central banks—the Federal Reserve and the European Central Bank—continue to diverge in policy, putting downward pressure on the value of the euro. The Fed expects to lift interest rates three times in 2017; the ECB is still engaging in its massive quantitative-easing program.
The euro in December reached its lowest level against the dollar since early 2003, falling to just $1.0352. It has weakened 3.1% against the greenback this year and is down 8.8% from its peak in May. It ended the year at $1.0520.
“A weaker euro is in the interest of the euro-area economy, and pressing down on shorter-dated yields is a good way to [keep the euro weak] at a time when the Fed is moving in the other direction,” said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe.
A combination of a weak euro, decent economic growth and a stronger performance for banks could be just what European investors have wanted for years—at least for those bold enough to remain in the market despite political turbulence.
In 2016, international money managers soured on Europe: In the first three quarters of the year, the eurozone suffered net outflows of about €405.4 billion ($423.8 billion), according to ECB data.
There are good reasons to think that 2017 will offer a repeat performance: Anti-euro parties could score big wins in French, Dutch and German elections, putting the future of the European Union in…