Economic indicators are virtually unanimous in pointing to (very) strong global growth in the second quarter. Confidence is high at both the consumer and business levels, with Purchasing Managers Indices particularly buoyant – typically reliable leading indicators.
Politics rule our investment letter again this month, albeit shifting focus from the US to Europe. With the first episode of a heavy 2017 electoral agenda just around the corner, investors are understandably concerned that a populist backlash could undermine the European construction. Our position, taking a hard look at each of the countries involved, is that the European Union (EU) will likely not only survive the political challenges of 2017, but perhaps even emerge more united – thus in a better position to rethink its future.
The first weeks of the Trump term have been animated, to say the least.
Far from “rising to the function” as many were hoping, the new US President has kept to his Twitter style and set about running the country as if it were a company. We are convinced that institutions will eventually constrain him, be they the Congress (manifestly in no hurry to confirm the nomination of several Trump candidates), courts of law (as is occurring on the issue of immigration), the Federal Reserve or state governors. Pressure from the US corporate sector is also already evident. In domestic affairs, Donald Trump will thus have to start to compromise.
The economic picture is looking good as we enter 2017 – and stands to get even better in 2018. Growth is accelerating globally thanks to less austere fiscal policies and large infrastructure investments. After decades of trial and error, central banks have found the holy recipe to avoid recessions and keep inflation at a moderate level: durably low interest rates and episodic money printing.
Having begun 2016 in an extremely pessimistic mood, equity markets are ending the year on a high note. Brexit vote, Trump election, OPEC agreement to cut production (pushing the oil price upward), political disruption in Italy: no event has been “bad” enough to derail the upward march of most equity indexes for more than a few hours or days.
Somewhat distrustful of polls (a lesson from the Brexit referendum), we chose not to put our monthly thoughts to paper until the result of the US vote was known. In hindsight of course, this proved a wise option. The election of Donald Trump as the next President is a true game changer for both the US economy and financial markets.
Last month we wrote about a number of black swan events that could generate financial market volatility over the coming weeks and months. Many of the short-term risks that we are monitoring actually share common roots – roots that reach back several decades. Reflecting on how the world has arrived to the current maelstrom of voter unrest, debt-strapped governments, distressed banks and increasingly impotent central bankers is key in our view to understanding the drivers of future investment returns.