The Lowdown on Markets to 27th January 2017
World Markets at a Glance
In this week’s issue
- The US president completes his first week in the Oval office declaring his intent.
- Trade protectionism, immigration, Obamacare, and infrastructure are on the agenda.
- UK Prime Minister, Theresa May meets US President Donald Trump at the White House.
- The UK Supreme Court rules that parliamentary consent is needed to invoke Article 50.
- In the FX market both the US dollar and sterling begin to strengthen on political events.
- Whilst markets might falter any pull-back could be met with a buy on the dips mentality.
“Stock markets defy disappointing economic and political consequences”
The US President, Donald Trump, has spent his first week in the Oval office carrying out some of his proposed policies from his pre-election campaign. If any of the world’s leaders or governments had any reservations about president Trump’s intentions or directives then they shouldn’t after what can only be described as an action packed Donald Trump week of communicative objectives and a strong declaration of his intent.
The presidents attacks on criticizing the media, halting refugee admissions, and temporarily barring people from seven Muslim-majority countries into the US, has created much uncertainty, which in turn, has led to one US Federal judge issuing a temporary halt order against the deportation of visa holders or refugees stranded at US airports. Likewise, the president’s Pacific trade exit, and future building of the Mexican wall appears to have put protectionism at the forefront of US policy.
“All of these events seem to have been greeted positively by the US stock market”
Other important actions and events that have taken place in his first five days in office have been the proposed dismantling of Obamacare, the re-opening of the Dakota pipeline, moves on infrastructure spending and deregulation. And in respect to global communications, the president has spoken to numerous overseas government officials, and then at the end of the week, hosted the UK prime minister, Theresa May, at the White House. Surprisingly, all of these events seem to have been greeted positively by the US stock market.
In fact, we saw the Dow Jones industrial Index close above 20,000 for the first time in its financial history; indeed, it has taken 18 years for this index to double; given that it was March 1999 when it actually passed through the 10,000 level. Obviously, that was back in the heady days of the 1990’s when the technology dominated NASDAQ index rose from under 1,000 to 5,000, peaking at 5,132.52 in March 2000, before crashing, as the tech bubble burst, and billions of dollars were lost.
Clearly, since the US presidential election, the markets have been very rewarding for global investors and the rise on Wall Street has now been heralded as the “Trump rally”. Nevertheless, it would now seem that over the last few days the US equity market might be losing some of its momentum, with some bouts of profit-taking very evident. However what is Interesting, and perhaps unexpected, is the rise in the emerging and frontier markets, given the earlier concerns over protectionism, rising US interest rates, and future concerns over a stronger US dollar. So far this year the MSCI Frontier and emerging market indices are up by 7.0 and 6.5 per cent respectively, therefore, what is this actually telling us?
“The rise on Wall Street has now been heralded as the “Trump rally”
Understandably, we have seen some rotation out of bonds and into equities since the US election but the out-performance of the developing markets over the developed are rather surprising. Also if you look at the two indices, the MSCI World, and the MSCI World ex USA, it would seem to indicate that global investors are looking to increase their exposure outside the United States in favour of other selective markets, given that the current returns on those indices are currently 2.98 versus 3.50 per cent.
Admittedly, global investors are still actively trading the NASDAQ Composite, and NASDAQ 100 indices, which are up by 5.16 and 6.26 per cent respectively, given their exposure to industrial and technology stocks which are obviously sensitive to some of the proposed Trump policies.
Similarly, the problematic issues that now face Prime Minister, Theresa May; about fast tracking her Brexit plan has tarnished some sentiment towards the UK stock market. Indeed, after she suffered a defeat in the Supreme Court, whereby they ruled that the prime minister would need consent from parliament before triggering Article 50, has taken its toll on the FTSE 100 Index given that it is likely to be more responsive to domestic issues over the coming months than events happening outside.
“Sterling has risen by around 5.0 per cent against the greenback”
Certainly another important influence that will affect the directional trend of the FTSE 100 Index will be the prospects for sterling, given that the recent trend has seen the pound strengthen against the US dollar. In fact, since the 15th January 2017 sterling has risen by around 5.0 per cent against the greenback, which is interesting, given that the pound has actually depreciated by around 18 per cent since the European referendum.
Obviously, if this trend were to continue, and we were to see sterling strengthen further then this would begin to have ramifications for many of the UK’s largest corporate earners, whilst reflecting more favorably towards those domestic companies and UK imports. But of course, the likelihood is that the pound will come under further pressure once the prime minister invokes Article 50 and the US dollar begins to strengthen further against the backdrop of higher US inflation and interest rates.
Unequivocally, it does feel that we are at a crossroads for the financial markets, and about to enter a new paradigm, perhaps seeing less intervention from the central banks and more participation from governments, and more so from those significantly powerful and persuasive political leaders. In fact, we only need to follow what is currently happening in the United States, and the UK, to witness this.
Therefore, whether we look at the bonds, equities, commodities or currencies, changes are on the way, and the chances are that over the next decade we will experience further directional changes from monetary to fiscal policy, globalism to populism, stagnation to inflation and regulation to de-regulation, all of which is likely to see big rotational activities both from a geographical, sectoral and fundamental perspective.
“The Dow Jones Industrial Index managed to close above the 20,000 milestone”
Certainly fund managers, research analysts, and global investors will need to be much more selective in their investment strategies and ideas going forward, given that the leading central bankers around the world are likely to be less pre-emptive in their support for the financial markets if a future crisis were to develop, however, the politicians are likely to be more prominent in such circumstances.
Finally, moving onto last week’s market moves, the Dow Jones Industrial Index managed to close above the 20,000 milestone, with healthcare and the technology sectors doing particularly well, whilst energy stocks and consumer staples lagged. Admittedly, US fourth-quarter GDP numbers in the last three months of 2016 were slightly disappointing coming in at 1.9 per cent annualized versus the markets expectation of 2.2 per cent.
In the UK the FTSE 100 Index had a mixed week but did benefit from the sharp rise in Tesco shares after it announced its takeover of Booker. Similarly, whilst the Euro first 300 Index recorded a rise over the week many of the European bourses experienced some disappointment. And in the Asian markets, trading was rather thin, given that China and South Korea were shut for the lunar New Year.
Overall, the global equity markets continue to trade on political events more that fundamentals and this trend could carry on for some weeks yet , but of course global investors need to be mindful that a correction could be imminent especially if the “Trump trade” loses further momentum over the coming weeks, however, the “trend is your friend” and therefore any meaningful pull back is likely to be met with a “buy on the dips” mentality until that upward momentum is broken by a significant event.
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 .