The Lowdown on Markets to 13th January 2017
World Markets at a Glance
In this week’s issue
- Global equity markets continue to rise aided by the Trump trade and the financial sector
- President Barack Obama makes his farewell speech to the US citizens and the world
- We are now on the cusp of change both from a political and economic perspective
- We move on to the inauguration of Donald Trump, Brexit and the European elections
- In respect to the central banks the focus will remain on the Fed and further rate hikes
- The end of the 30-year bond proxy could see a further rise in global equity markets
“The global equity market rally continues but for how much longer?”
Global equity markets have continued to rally in the first two weeks of the New Year, helped along the way by the persistence of the “Trump trade”, but perhaps more importantly last week by a rise in the S&P financial sector after a batch of very respectable US corporate earnings numbers from some of the leading US financial banks. Furthermore the US dollar remained steady whilst we saw some short-term selling of Treasury bonds on the back of the latest US economic data. However, it has to be said that some global investors have actually been re-investing back into the debt markets after questioning the earlier fears of Trumpflation.
Clearly, the global equity markets have been very rewarding for global investors over the past few years; if they remain resilient from now until March we will be celebrating an eight year bull market that began back on the 09th March 2009. But of course, in reality this is a rather short time period given that the current bull market in bonds is about 30 years old. Undeniably, money inflows into both asset classes since the financial crisis, and the intervention of the central banks, has really picked-up momentum and is responsible for certain asset bubbles that have now appeared.
“The global equity markets have been very rewarding for global investors over the past few years”
In the government bond markets we have seen the central banks become the largest buyers and bondholders of sovereign paper, whilst the global investor has pursued a growth and income strategy to try and capture both the upside from global equity markets, whilst in receipt of the income from dividends. Logically, this has been the correct strategy to follow given that we have been living in a world that seen cash deposits deliver such low returns.
But are we now on the cusp of change, both from a political and economic perspective. We have already seen some immediate changes in the political landscape with the United States voting for Donald Trump as the new president – elect, and of course, in Britain we have seen the electorate vote in favour of leaving the European Union, which has then led to a change of Tory leadership and a cabinet reshuffle.
Clearly, the promise of a cut in US corporation taxes, a huge infrastructure spending programme, a review of the regulatory system, and protectionist policies, certainly won over the US electorate for Trump over Clinton, and subsequently Wall Street which has rallied to a new all-time high on the back of the “Trump trade”.
And in respect to our exit from the EU, and the uncertainties over the European political scene, this does not appear to have deterred the global investor. Indeed, since the European Union vote in June 2016 we have seen sterling devalue by 18.0 per cent, and the FTSE 100 Index rally by 23.0 per cent, which in turn, has been very rewarding for those UK investors with overweight positions in global asset classes. However, the likelihood going forward is that the UK will need to change its economic model by attracting further investment from overseas investors, generate new trade agreements, and become much more competitive in the world.
In the US, recent hawkish statements out of the Federal Reserve Bank about further interest rate hikes throughout 2017 will have implications for the US dollar, indeed, FX traders fully expect the dollar to strengthen over the year, especially, with the euro, yen and sterling expected to weaken given the political uncertainties within the Eurozone and concerns over Brexit.
“The UK will need to change its economic model by attracting further investment from overseas investors”
Equally, the emerging markets could be vulnerable to higher US interest rates and a stronger dollar, however, saying that, any weakness within EM’s tend to impact the markets pre-rate hikes, in fact, once the first hike is implemented the markets tend to react supportively and then perform fairly well thereafter. Interestingly enough, these markets have reacted positively since the beginning of the year with the MSCI Emerging Markets Index up by just under 4.0 per cent for 2017.
Another issue of contention might be the recent resurgence of inflation, given that this could have consequences for some of those rather expensive consumer staples stocks, and of course, the bond markets. Clearly, last year’s big rise in the crude oil price, from just under US$30.0 to the current US$52.0 a barrel, is beginning to have an inflationary effect at the petrol pumps, food prices and pen-ultimately the consumer.
Whilst the global equity markets could rise further over the coming months, it is quite likely that we will see some rotation out of those sectors that have done well in a low interest rate and inflationary environment into those that are positively correlated to interest rate hikes and higher inflation. Also we might just see value stocks begin to out-perform growth stocks, given that the latter is inclined to do better in an ultra-low interest rate environment, whilst the aforementioned perform better in a rising interest rate and inflationary environment.
Also the importance of fundamentals such as valuations and corporate earnings will become much more significant over the coming years given that the decade of loose monetary policy, quantitative easing, and regular central bank intervention draws to an end. Indeed, global investors will need to be much more flexible and ready to embrace change within the political and economic landscape, which in turn, will have implications for asset allocation, both geographically and sectorally.
“There will always be opportunities”
Understandably, there will be times when the markets become extremely volatile, especially, after such an extended bull market, however, there will always be opportunities under such conditions as long as investors remember that what worked in the last decade is unlikely to work over the next.
Finally, in respect to last week’s markets, Wall Street remained tantalizingly close to its all-time high helped by some robust corporate earnings numbers from the major US banks, although weakness from the utilities and telecom sectors held the market back. In the UK the FTSE 100 Index continued on its record breaking journey, and of course, if sterling were to weaken further then it is likely that the Index will continue to rise. In Europe the financial stocks were in a buoyant mood, helped by the news from the US banks. And in Japan, whilst the Nikkei 225 Index was fairly flat over the week we could see the market rally further if the yen were to weaken against the US dollar over the coming weeks.
As for the commodity markets, the price of Brent crude oil closed just above US$55.0 a barrel whilst the price of gold closed a whisker below US$1200.0 a troy ounce. And to conclude, on the political front we saw President Obama make his farewell speech to draw his presidency to a close whilst we wait for the inauguration of Donald Trump as the 45th President of the United States of America.
Peter Lowman Chief Investment Officer
Peter Lowman Chief Investment Officer Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .