The Lowdown on Markets to 24th March 2017
World Markets at a Glance
In this week’s issue
- Equity markets wobble over pace of US reforms with Obamacare taking centre stage.
- The S&P 500 Index records its biggest one day fall since October as the Vix Index rises.
- Europe, Asia and the emerging markets still look appealing on a valuation perspective.
- In the UK the Prime Minister reveals that Article 50 will be invoked on the 29thMarch.
- In the FX market the US dollar continues to struggle against the euro and the yen.
- A broadening out of global growth creates a brighter outlook for riskier assets in 2017.
“A week of doubt affects sentiment in the financial markets”
This was a week when Trump policies took the main stage from last week’s Federal Reserve Bank decisions. The embattled Trump bill seeking to replace large parts of Obamacare was repelled from the floor of the house by a relatively small number of conservatives and moderate Republicans. This left the president with very little wriggle room saying that the overall Republican effort in Congress to repeal and replace Obamacare could be suspended for some time, as his administration will now focus themselves towards the issue of tax reforms. But of course, a problem with healthcare could make the passage of tax reforms a little trickier.
Clearly, the failure of the Republican leaders to get their replacement plan passed in the House did see the likes of the defeated presidential candidate, Hillary Clinton; tweet “Today was a victory for all Americans”, similarly, the president was heard to say in a statement from the Oval Office “I’m a little surprised” whilst House speaker, Paul Ryan, said “we just didn’t quite get consensus today but we came very close”.
“Today was a victory for all Americans”
Understandably, investors viewed this repeal vote as a clear test for the Republicans remembering that the Trump administration were voted in by those that wanted change and saw Donald Trump as the man to shake up the system. In his inaugural speech he promised to make “America first” and vowed to make positive changes that would see America flourish again. Clearly, this first set back on Obamacare might now create some doubt about other promises such as tax reforms, deregulation, and infrastructure spending.
Certainly, since November 2016 the financial markets appear to have been rising on those promises and subsequent “Trump trade”. But of course, this was always going to be overstated given that talk is one thing, but implementation is totally something else. Besides, there has also been some better news in respect to the US and global economy which has also attributed to this recent rally.
On the other hand, some global equity markets such as the Wall Street are looking richly priced; and are fairly dependent on Trump getting his economic agenda through, therefore; it will be no surprise if investors step back and take a reality check from time to time. And of course, this week’s pull back in stocks was also accompanied by a jump in the CBOE’’s Vix volatility index. Inevitability, it’s the US equity funds that have suffered from recent redemptions given the quarrel amongst the Republicans over the politically sensitive healthcare legislation and the more hawkish comments coming out of the Federal Reserve Bank.
“It will be no surprise if investors step back and take a reality check from time to time”
Conversely, we have seen a meaningful inflow of funds into regions such as Asia [ex Japan] and the emerging markets where equity valuations look more attractive versus those of the US. Similarly, interest appears to be picking up in Europe given that the Populist vote might be fading. Clearly, many global investors appeared to have given up on Europe last year, clouded by the uncertainties surrounding the political backdrop, but with the recent Dutch elections displaying that there was a fall in the populist vote, which has rejuvenated some investor’s appetite for the region. Also with current valuations so appealing, and the ECB president, Mario Draghi, becoming more bullish on the outlook for the Eurozone further positive investor sentiment cannot be ruled out.
Obviously, European officials and investors are still nervous about the UK’s positioning on invoking Article 50, however, the UK Prime Minster, Theresa May, has now revealed that she will actually trigger Article 50 on the 29th March 2017. This means that Britain should officially leave the EU no later than April 2019. Understandably, this could be a difficult period for both the European Union and Britain, but interestingly enough the economic conditions for both the UK and Europe have actually strengthened in recent times, therefore, we must now keep a very careful eye on the negotiations given that this could jeopardize what appears to be better times for both regions.
“For Britain our recent statistics have seen growth in manufacturing, an increase in exports, unemployment is down, imports have improved, and average earnings have risen”
Certainly, for Britain our recent statistics have seen growth in manufacturing, an increase in exports, unemployment is down, imports have improved, and average earnings have risen, which has led to the Bank of England increasing its economic growth forecasts for the next three years. Also from a UK stock market perspective we have seen the FTSE 100 Index record a new all-time high whilst the devaluation in sterling has stimulated frenzy in M&A activity.
Clearly, global equities do look cheaper than bonds on a valuation perspective and are starting to benefit from the global economic recovery; however, it may be necessary for further stimulus and reflationary measures to be implemented for the recovery to gain further momentum even though the recovery does seem to be on its way.
Whilst the prospect of inflation has certainly dominated asset allocation over recent months global investors will still need to consider the prospect that weakness in global productivity growth could mean that a further disinflationary pattern could re-asset itself. With this in mind, periods of higher volatility could be experienced in the marketplace leading to significant corrections especially after such an extended bull market period.
“Periods of higher volatility could be experienced in the marketplace”
Equally, there are many global investors now looking for a meaningful correction given that there is still a significant amount of money sitting on the sidelines and as yet have seen very little in respect to the predicted rotation out of bonds and into equities. Also a broadening out of global growth and signs that the reflationary theme is gaining some momentum does create a better environment for riskier assets; therefore, we are likely to see a continuation of the “buying on the dips” mentality.
Finally, in respect to last week, a plunge in investor sentiment saw the equity markets retreat with the S&P 500 recording its biggest one-day fall since October and the FTSE 100 Index recording its biggest weekly drop in two months. In Europe the markets suffered from the uncertain outcome of the US healthcare bill whilst in Japan the market recorded its second successive weekly decline.
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 .