The Lowdown on Markets to 3rd February 2017
World Markets at a Glance
In this week’s issue
- Global equity and bond markets continue to rise but maybe the “Trump trade” is fading.
- The Fed and the White House seem poles apart on their future strategy forecasts.
- Transatlantic accord between the US and Germany seems to be rather strained.
- Japans Prime Minister Shinzo Abe reacts immediately to the US president’s comments.
- Financial markets are still trying to come to terms with the vagaries of the political scene
- Global equities still remain the asset class of choice but it’s becoming more difficult.
“Global asset classes are beginning to react to complex worldwide events”
Since the US presidential election, back in November 2016, the global markets have been trading on what has become known as the “Trump trade”, reacting positively, but sometimes ludicrously to the new presidents proposed economic and populist policies, irrespective of their likely consequences.
At times over the last twelve weeks the stock markets have given investors the impression that the World economy has shrugged off the uncertainty for now and subsequently been rallying on the fumes of euphoria rather than the uncertainties that we might now be facing from the new US administrations populist policies,  Brexit, or  the political events that might now unfold in Europe, as we head towards a year of European elections, the invoking of Article 50, and maybe a more challenging time for China.
“Growth forecasts are likely to be upgraded in the near future”
However, despite the increasing uncertainties that are building around the Trump presidency the world economy is strengthening with business surveys signaling an acceleration in growth, indeed, growth forecasts are likely to be upgraded in the near future, equally, it must be said that the rise in oil prices and inflation will take its toll on the consumer as costs continue to rise throughout 2017.
Clearly on the subject of inflation, Europe faces a significant headwind in 2017 given that it is set to rise further reducing the purchasing power of households, whilst the political uncertainties both in the UK and continental Europe rage on. Even so, the cyclical indicators would suggest that growth was stronger than was originally expected at the end of 2016 with momentum continuing into the month of January, furthermore, employment growth and wage recovery seems to be improving.
But of course, the window of opportunity, that could determine further global economic recovery, could widen, or indeed, close rapidly, and the answer to that question could firmly rest in the hands of the US president, Donald Trump. Clearly, in his inaugural speech he said “from this moment on, it’s going to be America first” and we have already seen from initial pronouncements on trade, taxes and immigration that he fully intends to back up that statement.
“The answer to that question could firmly rest in the hands of the US president, Donald Trump”
Certainly some of his early statements, like cancelling the Trans-Pacific Partnership [TPP], the trade agreement between the US and Pacific Rim countries, the halting of all refugee admissions, and the temporary barring of people from seven muslim-majority countries into the United States has been condemned by many, both internally and externally. Understandably, on the last point we have seen much condemnation which has already led to the president sacking the US Attorney General, Sally Yates, whilst having to contend with the US Federal Justice Court on the legality of such a ruling.
Also there seems to be some skepticism on the ability of the new US administration to be able to generate further growth and employment, to support their projected 4.0% growth target. Surely, their proposed fiscal and trade protection policies indicate that they are limiting their availability to supply goods to the outside world, therefore, increasing the probability of upward pricing pressure.
Likewise, the prevention of the larger US global companies to try and reduce their overall costs, by relocating parts of their business overseas, would also seem to be a deterrent for US growth, which in turn, is likely to trigger a period of higher US inflation. And of course, coupled with the prospect of higher interest rates, and a stronger US dollar, could lead to a meaningful correction in bond market.
“Investor’s appetite for bonds has remained strong at the beginning of this year”
Admittedly, investor’s appetite for bonds has remained strong at the beginning of this year, with companies and governments around the world continually raising money. But of course, this could change fairly quickly if inflation, interest rates, or investor appetite were to alter in any meaningful way. Also what seems to becoming clear, as the months pass by, is that the 30-year bull market in bonds seems to be coming to a graceful end.
Other issues of contention that are mounting seems to be the Mexican stand-off between the Federal Reserve Bank and the White House, given that the new administration seems to believe that investment in infrastructure, tax cuts, and protectionism will kick-start a resurgence in the real economy, whilst, the Fed chair, Janet Yellen is warning about the implications of higher inflationary pressures, indeed, in a recent statement she said “I think that allowing the economy to run markedly and persistently “hot” would be risky and unwise”. Therefore, on the one hand, we have the Federal Reserve Bank wanting restraint, whilst on the other; you have the White House that wants stimulus.
Similarly, the Transatlantic accord between the US and Germany seems to be under some stressful tension, given the recent remarks from Peter Navarro, the head of Donald Trump’s new National Trade Council. Mr Navarro commented that “Germany is using a grossly under-valued euro to exploit the US and its EU partners, to which, German chancellor, Angela Merkel, responded by saying “that Germany could not influence the value of the euro”. Furthermore the German chancellor went on to say that “Germany has always supported an independent European Central Bank”.
“The Transatlantic accord between the US and Germany seems to be under some stressful tension”
Likewise, Japans Prime Minister Shinzo Abe has reacted immediately to Donald Trump’s attack on China and Japan for supposedly saying that both were playing the devaluation game. Mr Abe was very swift in telling the Japanese Government that “this kind of criticism they are making about yen manipulation is incorrect”. Clearly, this ongoing breakout of currency valuation is raising the stakes for a further round of “currency wars” which could get rather nasty if not moderated. Certainly the vast movements in currency markets last year were a bigger issue of contention for investors than the markets themselves.
Perhaps another topic worthy of a mention, given the recent comments from the United States on protectionism, has been the increase in overseas property investment. In 2016 it was reported that Chinese real estate investment had risen by over 50.0 per cent from the previous year. Interestingly enough, at the end of last year the Chinese authorities then announced that they would be bringing in tighter capital controls to discourage future outbound money.
Investment in residential, commercial and industrial property totaled some US$33.0 billion in 2016 with the US being the most popular destination for the second consecutive year, followed by Hong Kong, Malaysia and Australia, the UK was ranked fifth in the figures. In respect to future purchases, it is still believed that Chinese investors will continue to move capital into global real estate regardless of the new tighter controls, however, perhaps less so into US assets.
And so looking at the markets last week, both global equities and government bonds did experience a demanding five day trading period with Wall Street closing just below its all-time high helped by a strong rally in the financials. In the UK the FTSE 100 Index smarted from a sharp sell-off in the mining stocks but was helped by gains in the financials and energy. Likewise, in Europe the FTSE Euro-first 300 Index reacted positively to better-than-expected corporate earnings numbers whilst in Asia the Nikkei 225 Index had a disappointing week retreating by just under 3.0 per cent.
Perhaps surprisingly for many market watchers has been the upsurge in interest into the more exotic markets, of Asia [ex Japan] frontier and emerging markets which have seen rises of between 5.0% and 6.0%. In respect to the developed markets, Wall Street’s NASDAQ Index has been the stand out market, up by a similar amount. In the commodity markets we have seen the gold price rally by 6.0% whilst in energy, the crude oil reacted positively after the US Treasury Department launched a fresh round of sanctions against the Iranians in the wake of their test launch of a ballistic missile.
“Global equities still remain the asset class of choice”
Clearly, the financial markets are still trying to come to terms with this extraordinary change of the political outlook around the world, and what that means for the global economic backdrop over the longer-term. Whilst global growth is expected to be upgraded, led by a more optimist view on the emerging markets, the uncertainties surrounding the Trump presidential tenure, and the Brexit effect, is likely to keep the markets quite volatile. Arguably, the real fear is that perhaps a period of weaker growth might transpire, leading to a tenure of secular stagflation, and political turmoil.
In respect to asset allocation global equities still remain the asset class of choice but it’s becoming much more of a skilled stock pickers market, given that many companies share prices are looking fully valued and in some cases expensive, definitely a time for those skilled fund managers to find those businesses that still offer investment opportunities, and total returns, worthy of the risks that must be taken to deliver their unit holders sensible returns in rather tricky market conditions.
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 .