The Lowdown on Markets to 21st April 2017
World Markets at a Glance
In this week’s issue
- Geo-political events in Syria and North Korea make way for the French election
- Global markets adopt a cautious stance ahead of European political developments
- Macron and Le Pen win the first round of voting and so move on to the final vote in May
- The UK prime minister, Theresa May, surprises the market with an early General Election
- Both sterling and the euro rally on the back of the French vote and UK election surprise
- Whilst stock markets have risen this year concerns still remain about the reflation story
“Geo-political tension and elections have created higher volatility levels”
Clearly, the recent build-up of geo-political tension between the United States, Syria and the North Koreans has left the financial markets, and most global investors feeling rather nervous, which has then subsequently led to a dip in the financial markets and a rise in the volatility levels seen in the Vix Index. However, global markets now have to embrace a further uncertain period in respect to the forthcoming European elections with the first round of the French presidential election having been held under a high security alert.
With the four frontrunners of Macron, Le Pen, Fillon and Melenchon very close in the opinion polls it was logical that investors switched their immediate anxieties from the geo-political confrontations in Syria and North Korea to the uncertain outcome of this election. Certainly, the aftermath of what actually happened last year in both the European referendum vote, and the US presidential election has left many global investors much more cautious about opinion polls and future election result.
“Who ever wins does show a marked shift away from the left and centre parties that have dominated French politics for a long time”
Anyway, the centrist Emmanuel Macron and the far right leader Marine Le Pen have won the first round of voting in the French presidential elections with the projected results saying that Macron has won 23.7 per cent of the votes whilst Le Pen won 21.7 per cent, therefore, the pair will now face a run-off vote on the 07th May 2017. Clearly, who ever wins does show a marked shift away from the left and centre parties that have dominated French politics for a long time.
Furthermore, whilst the political backdrop is clearly changing in France it could actually be an Italian election that creates the biggest reaction to financial assets, given that the Italian electorate might be even more susceptible to a populist vote. And of course, both of these EU member states could be vulnerable to their own referendum vote, especially if we see any change of public support for the European Union.
There is also the German election to consider, but perhaps with the expected result being less of a concern. However, the biggest shock in the political calendar has actually come from the UK Prime Minister, Theresa May, calling for an early General Election which was a total surprise and caught the market off guard. Indeed, whilst the British electorate thought that they would be heading for the polling stations in May 2020 they will now be voting for the second time inside a year. Clearly, this is a ploy by the Prime Minister to try and increase the government’s current majority, hereafter giving her a stronger negotiating platform for Britain’s exit from the European Union.
“The calling of an early UK General Election is likely to keep the pound trading in a narrow band”
Understandably, this had an immediate effect on FX market, with sterling rallying strongly, hitting a six month high, whilst the FTSE 100 Index quickly retreated given its 80 per cent company exposure to overseas earnings. On the face of it, the calling of an early UK General Election is likely to keep the pound trading in a narrow band, but we could also see it rally higher against the like of the US dollar and the euro, especially if the proposed US tax reforms go badly, or we have further political shocks in the forthcoming European elections.
Unequivocally the post-crisis road towards economic stability, and normalisation, has been a long one, indeed since those crisis days the major central banks have been carefully implementing both monetary and fiscal policies to try and support better growth and economic data, which in fairness, has been fairly successful, and of course, policy support will remain in place for some time to come.
Whilst to some extent the financial crisis has now passed, the markets now have to contend with other issues such as geo-political upheavals, the rise of populism, inflationary pressures, and fears that central banks might make some impending policy mistakes. Unquestionably these issues can be just as dangerous for financial assets and markets as was the financial crisis, especially if any one of them was to evolve into something more sinister. But of course, all of these concerns are firmly in the hands of the leading government and bank officials, negotiators, and the electorate.
“The global economy does continue to portray a rather upbeat image”
Now turning towards the fundamentals, and the business cycle, the global economy does continue to portray a rather upbeat image; however, a recent stalling of crude oil and commodity prices has led to some market analysts questioning whether the current reflationary trade can be sustained, which in turn, has led to a recent pick-up in the “risk off” trade as investors become more nervous.
Equally, looking at the global economy we can see that the US remains the best performing economy with strong consumption and a rebound in investment, the eurozone is now expanding, despite the political risks, Japan’s leading indicator has risen for a seventh month in a row, whilst its PMI number has hit a four-year high, and the IMF has upgraded its UK growth forecast for 2017. Similarly in most of Asia and the emerging markets, evidence of a pick-up in corporate earnings figures, and attractive valuations, has led to substantial money inflows into these regions.
Clearly, the markets are likely to remain nervous over the coming months given the uncertainties that still appear over the reflationary story and the unknown consequences from those impending UK and European elections and geo-political events. However, there is still a valid case for selectively buying equities on any meaningful dip due to over reactions towards any of those issues. Indeed, it could be said that the markets have actually been very resilient in recent times, all considered, which might be a positive sign that perhaps global investors have now learnt not to panic in a crisis but to analysis the event prior to making any moves.
Finally, it is always worth remembering what Warren Buffett once said “Be fearful when other are greedy and greedy when others are fearful”.
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 .