The Lowdown on Markets to 9th December 2016
World Markets at a Glance
In this week’s issue
- This year will be heralded as the year when populism and nationalism flexed its muscles.
- Unequivocally, this was a “November to remember” with a probable path of change.
- Wall Street continues to climb from the euphoria of the US presidential election.
- The constitutional referendum in Italy sees Mr Renzi resign after a humiliating loss.
- ECB announces continuation of QE but a change of strategy will apply in 2017.
- Next year’s economic environment is likely to resemble that of 2015-2016.
“Global equity markets continue to rise on the back of Wall Street”
Unquestionably, this year will be heralded in the financial history books as the year when populism and nationalism flexed its muscles and voiced its opinion through the voting boxes after a decade of uncertainty that followed from the global financial crisis in 2007/08, and ensuing crisis thereafter.
Whilst many of the leading western governments, and central banks, have continually struggled to prevent any further financial upheavals the upshot is that their fiscal and monetary policies have created asset bubbles in global equity and bond markets, whilst economic growth has remained subdued. The effects of austerity and adversity has led us to some surprising election and referendum results which is likely to change the political and economic landscape over the coming decade.
Clearly, the British person voting in the European referendum back in June was the first sign that we might be entering a period of political change. Indeed, whilst the actual vote was always going to be close it was thought that “remain” would be the outcome, in fact, the turmoil that followed the “no” vote saw the prime minister, David Cameron resign, followed by comprehensive change in the Tory governments line up, with Theresa May becoming prime minister, and inheriting the demanding task of deciding when to invoke Article 50, and beginning the procedure for the UK’s withdrawal from the European Union.
Understandably, the UK’s referendum result has indeed placed a rather unsavory political shadow over the rest of Europe at a time when there are some very important elections and referendums being held across many parts of Europe. Regrettably, this has already led to some problematic and heated debates between leading statesmen across Europe, and of course, from a UK perspective our departure from the European Union could create a “hard Brexit” for our economy. In any case, the UK economic landscape will undoubtedly change over the coming years.
“The UK’s referendum result has placed a rather unsavory political shadow over the rest of Europe”
But of course, the biggest event held this year was the US presidential election, which again, created a surprising result as Donald Trump was victorious over Hillary Clinton. In the same way as the UK’s European referendum, the polls were showing a narrow Clinton victory but the reality was that whilst Mrs Clinton had a higher share of the popular vote, Trump was able to secure a series of significant battleground states such as Florida, Ohio, and North Carolina, then stunningly getting Pennsylvania, a state that had not backed a Republican for president since 1988. He then went on to clinch victory by capturing Wisconsin.
Clearly, his charismatic approach to changing Americans political and financial backdrop has won over the populist voter and already we have seen the US stock market react positively to the new administration and proposed changes. Indeed, president elect, Donald Trump’s billionaire cabinet could be the wealthiest administration ever put together by a US president. Todd Ricketts, Steve Mnuchin, Wilbur Ross, Betsy DeVos,Tom Price, Jeff Sessions, Elaine Chao, Steve Bannon, and Nikki Haley are just a few of the high net worth cabinet names that will form the new administration, with the likes of Mitt Romney, Rudy Giuliani, and Ben Carson tipped to be the next Trump recruits.
Unequivocally, this was a “November to remember” with a probable path of change being installed in the White House after the inauguration of Donald Trump, the 45th President of the United States, on the 20th January 2017. Clearly, some of the contentious comments and policy propositions that the new president has commented upon in the lead up to the presidential election were of concern, but it’s what the new president and his administration are able to do now that will be important.
Indeed, a Trump presidency will be about a commitment to tax reforms, with the biggest proposed changes since Reagan, a major infrastructure spending programme, a sustainable economic growth rate of between 3% to 4%, more jobs for US workers, bringing lots of cash back to the United States, increase American exports, a review of excessive regulation, which may have restrained growth, and a view that he might make changes to Obamacare.
“This was a ‘November to remember’ with a probable path of change”
Understandably, since the US presidential election we have seen Wall Street react positively to the result, given that the stock market does favor a government that is corporate friendly, and clearly Donald Trump, and his chosen administration, do have a certain amount of corporate background friendliness. Equally, with his proposal to spend a vast amount of money on infrastructure, many of the stocks within specified sectors such as mining, industrials, fossil-fuels, energy, construction and banking have already rallied aggressively over the past few weeks and are likely to remain in vogue.
Looking at some of the numbers since the election, the Dow Jones Industrial Index is up by 7.7 per cent, whilst the broader S&P 500 Index has risen by 5.6 per cent, however, it has been the smaller companies’ index, the Russell 2000 that has seen the most prolific rise since the election and rallying by some 12.0 per cent. Equally, we have also seen investors begin to reduce their positions in government bonds in fear of higher US inflation and interest rates. Approximately US$1.7 trillion was redeemed from the US bond market in November.
In fact, the path for higher US interest rates is likely to begin as early as this week when the Fed chair, Janet Yellen, is expected to announce a 25 basis point rate hike, only the second increase in 10 years. Understandably, the markets have already discounted this rise; therefore, it is more interested in any forward guidance that Ms Yellen might make towards 2017, given that additional monetary tightening is firmly on the horizon, especially under President-elect Donald Trump’s administration.
“Janet Yellen, is expected to announce a 25 basis point rate hike”
Moving onto Europe, Italian Prime Minister Matteo Renzi, gambled his political career on a deeply flawed constitutional referendum on the 04th December which he lost by a humiliating 20-point margin. This has subsequently led to Renzi resigning from his position and wrecking Italy’s fragile political and economic outlook. Once again, we have seen a “no confidence” show of hands from populist voters, which is now leading to a cry of “expect the unexpected” when further ballot boxes are counted next year in the Dutch parliamentary elections, the French presidential election and the German election.
This in turn, saw the European Central Bank’s president, Mario Draghi, announce last week that they would continue with their €80 billion bond buying programme until March 2017, but then decrease the sum to €60 billion per month until the end of 2017. Conversely, it is still likely that the ECB will continue with their stimulus well into 2018, be at a further reduced rate.
And so what will be the key takeaways for 2017? Clearly, the US economy is likely to remain at the forefront of what might happen elsewhere, and of course, president-elect Donald Trump and his administration will be carefully watched by overseas governments, central banks, economic analysts and the markets to see what he can actually achieve from his audacious policies.
However, from an economic perspective next year’s economic environment is likely to resemble that of 2015-2016 with growth remaining relatively low and rather subdued. Obviously, interest rates are likely to remain lower for longer but with the Federal Reserve Bank raising interest rates over the coming year.
Admittedly, much could depend on any inflationary pressures that become apparent, which in turn, could see the likes of the Bank of England reverse out their post Brexit interest rate cut. Any future monetary tightening, or signs of higher inflation, would be negative for the bond markets, and create further volatility in currency markets, similar to what has happened this year.
“Brexit and the new US president elect will continue to feature highly on the investment landscape over 2017”
And in respect to the political scene, undoubtedly those important elections in Holland, France and Germany could throw up some further surprises from the ballot box. But of course, Brexit and the new US president elect will continue to feature highly on the investment landscape over 2017.
Finally, the likelihood of what worked this year, working next year, is very unlikely. The 30-year bull market in bonds looks rather jaded and the prospects for the great rotation out of bonds into equities would seem likely, especially with interest rates and inflation on the rise.
Never-the-less, as we enter 2017, and with so many dynamic themes still in play, global investors will continue to face some fascinating challenges, however, we believe that opportunities will present themselves and that a ridged risk adjusted investment process will deliver some rewarding returns throughout the forthcoming 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 .