The Lowdown on Markets to 17th December 2016
World Markets at a Glance
In this week’s issue
- Global equity markets continue to Rally from the Trump effect and the Santa Claus Rally.
- Wall Street records yet more highs whilst the US dollar hits a 14-year high.
- The FTSE 100 Index closes above 7,000 securing its second successive weekly advance.
- In the bond markets the 10-year US Treasury bond yield hits a two-year peak.
- Oil markets have a turbulent week initially rising on OPEC news then steadily retreating.
- Equity markets have been rewarding in 2016 and still look better value than bonds.
“Global equity markets continue to rise but show some signs of fatigue”
As we enter the last few days of trading for 2016 the markets continue to rise, even if showing some signs of fatigue. Certainly, 2016 has been a year of extraordinary change which has seen the political backdrop for the United Kingdom, United States and perhaps Europe take a new direction as we go into 2017 and beyond. From Brexit, to the US presidential election, to the recent Italian referendum, we have seen the Anti-establishment begin to change the political landscape as a rise in populism, and distrust towards globalisation builds and appears to be gaining some momentum.
And in respect to next year, we do have some very important elections in Germany, France and Holland, with the prospects for further surprises and shock results, as the winds of change move across the Atlantic to the eurozone. Understandably, this is likely to create another year of political uncertainty and periods of higher volatility but it will also create investment opportunities.
If these political changes were to succeed, and we see a pick-up in growth and prosperity, then a further period of positive momentum in the markets is likely to occur, but if they fall short, then the likelihood is that we will enter a period of recession and volatile market conditions.
“For this year, investment returns from equities and bonds have been very rewarding for investors”
None-the-less, for this year investment returns from equities and bonds have been very rewarding for investors, and of course, since the European referendum vote, and the devaluation in sterling, we have seen returns for UK investors benefit from both the FTSE 100 Index, which has again rallied above 7000, and from any overseas assets held. I don’t actually think there have been too many people that have been predicting a continuation of this world-wide bull market for stocks and bonds given the uncertain start in the markets we saw at the beginning of the year when it was fully expected that the US Federal Reserve Bank would continue to tighten throughout 2016.
And so what should we look out for in 2017? The baseline is likely to be a continuation of global economic expansion, reinforced by further monetary and fiscal policies. But of course, under the new Trump administration we could also see a big pick-up in infrastructure spending, the cutting of US corporation tax, and a focus towards US companies producing their products deep within the United States for both domestic and distribution overseas. This in turn, is likely to safe guard US jobs, give US citizens more money in their pockets, and assist the central bank in their target for higher US inflation.
Indeed, only last week we saw the Federal Reserve Bank chair, Janet Yellen, announce a further 0.25 basis point interest rate hike, only the second modest adjustment in the past 10 years. And it is likely that they will be more active over the short-term to try and normalise interest rates given that both inflation and the US 10-year Treasury bond yield are both moving upwards. In fact, it is likely that we will see investors begin to rotate out of bonds and into either cash or equities at a fast rate over the coming few months and years.
And in respect to Europe, the ECB have announced that it will continue with its enormous stimulus package throughout 2017, which has strengthened Eurozone financial markets, however, the ECB president, Mario Draghi, said recently that they would reduce the level of stimulus to €60 billion per month from the end of March, but would maintain interest rates at their recent levels, or lower, if deemed appropriate. Similarly, the bank said that it might increase its program in terms of size, and duration, if the outlook begins to look less favorable. With three very important elections being held next year, the European markets, whilst looking attractive from a valuation perspective, are likely to experience a volatile year.
“The ECB have announced that it will continue with its enormous stimulus package throughout 2017”
Also the UK’s invoking of Article 50, to begin our exit strategy from the European Union, will have ramifications for both the UK and Eurozone economies. Equally, some Japanese financial institutions have already told the UK government that they intend to begin moving out some of their functions from London within the next six months unless they get some further clarity as to the UK’s future relationship with the European Union. Clearly, Brexit is becoming a dilemma for some international banks which could spill over to other sectors over time. Conversely, the sharp fall in the pound has already seen foreign tourist rates rise, and through import cost the rate of inflation, which is likely to continue over the coming months.
By the same token, the probability of the BoE raising interest rates sometime soon looks unlikely, indeed, the current predictions seem to indicate that UK interest rates won’t breach 0.50 per cent until 2021, but that might depend on how inflation behaves itself over the coming 12 months, the direction of sterling, and the pace at which the Fed begin to tighten.
“Markets have been prolific since the Trump victory and have also been helped by the seasonal Santa Claus Rally”
Other markets that will be under the microscope next year will be the emerging markets which up to now have performed very well this year, however, Trump’s election could start to act as a headwind given that the potential for fiscal stimulus in the US has become much more hawkish whilst the new administration has talked of protectionist trade policies. Clearly, this will create a more challenging time for EM’s. However, valuations remain attractive on a relative basis, commodities have started to recover, and the EM asset class still appears to be under owned, therefore, there are still selective opportunities.
But unquestionably, the biggest issue that the markets will face in 2017 will be based around the political scene, and the election outcomes in countries such Germany, France and Holland, along with the run-up to the 19th National Party congress in China, Brexit and whether the new Trump administration can carry out their audacious policies which could affect globalisation as we know it today, all in all, should make for a very interesting investment year.
And so looking at last week’s events the global equity markets were showing some signs of fatigue but not before Wall Street set more record highs, with the US dollar and US Treasury yields hitting multi-year peaks. But of course, it was the Fed chair, Janet Yellen that set the scene announcing that they would raise interest rates for only the second time in a decade and adopting a more hawkish stance. Certainly, the markets have been prolific since the Trump victory and have also been helped by the seasonal Santa Claus Rally.
Arguably, many of the equity markets are looking rather toppy and a meaningful correction cannot be ruled out, however, equities still look better value than bonds on a number of metrics and it is likely that the continual rotation out of bonds and into equities will be a theme that runs through 2017.
Lastly, from the directors and staff at Investment Quorum we would like to wish you all a very Happy Christmas and prosperous New Year.
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 .