8 to 13 November: Too Many Chiefs and Not Enough Indias

Coming into US election week, the S&P 500 had declined for 9 consecutive days – the longest losing streak in 36 years, for a cumulative loss of around 3%. On Monday however, the day after the FBI concluded there was no criminal wrongdoing in their probe of Democrat candidate Clinton’s emails, the market rallied back 2.2%. Then, in the early hours of Wednesday, when initial results suggested Donald Trump was set to win the Presidential election, S&P futures fell as much as 5%, Asian markets crumbled (Nikkei down 5.36%) and bonds rallied on a flight to safety.

That over the course of the following 3 trading days, we saw a veritable smorgasbord of asset price reversals (including a new all-time high for the Dow Jones Industrial Average, the highest yields on government bonds since January and the most significant rally in copper since 1980) must go down as one of the most significant about turns in market history.

Our appraisal of the seemingly incongruous market moves over the last month is as follows. With hindsight, we think price action pre and during the election (where declines were positively correlated with an increased probability of a Trump victory) were a sign of uncertainty and risk to the status quo, rather than an assessment of the economic consequences. The developed world is suffering from a structural decline in growth (lower productivity, lower labour force participation, ageing demographics). Over the past 35 years, this has prompted a monetary policy dominated response, which has resulted in a bond (and bond-proxy) market bubble, record leverage, falling inflation and high asset prices. Taking President Trump’s promises of a large scale fiscal stimulus at face value, there is now a potential shift in this cycle: government spending could accelerate growth over the medium-term but also, with the impact of import tariffs and a labour market near full employment, promote inflation and interest rate hikes from the FED. That is to say monetary policy could go into reverse – and this is what the market has begun to price with a 37bps increase in yield on the US 10yr and declines in share prices across the high dividend paying utilities, telecoms and consumer staples sectors.

Realistically, the outlook is more complex. First, whilst Trump has the benefit of the first unified government since 2008 (Republican’s control both houses of congress), we need to see to what extent he can and wants to fulfil pre-election promises (recall the headlines of 45% tariffs on Chinese exports, the building of a wall with Mexico, and a drop in corporate tax rates from 35% to 15%). Second, although we think the switch from monetary to fiscal stimulus is intuitively appealing, it is unclear whether it is a sustainable strategy. Certainly the US needs to improve its infrastructure and government investment to GDP is at multi-decade lows (therefore we could anticipate positive multipliers). However, it is unlikely this alone can spur a return to “normalised” growth. Moreover, the risks of unwinding the biggest bull market in history across fixed income are surely not inconsequential. Last, the anti-globalisation, anti-establishment undertones of the Trump victory are slower moving dynamics, but will create volatility.

In summary, we do not change our longer term views. Whatever policy set is pursued, the developed world does not have a sustainable real growth story. Similarly, bonds offer very little reward for enormous risk. Whether by a default/deflation spiral because of policy inaction (most likely in Europe), incremental monetary policy challenging faith in money as a store of value, or indeed the Trump style, deficit funded fiscal approach, the no inflation, no growth, no default paradigm will, at some stage, have to give.

This brings us to what might, in any other week of the year, have been the headline story.


India’s government went nuclear in its war on black money, by announcing the withdrawal of bank notes worth 9% of GDP. This forces billions of dollars of undeclared income to be deposited in the banking sector and simultaneously wipes out a chunk of the ill-gotten wealth of India’s tax-evading elite. Long term, this reform will do more for India’s development than almost any other single policy seen in recent times in emerging markets. Short term, frictions during the transition period will challenge established transaction models and disrupt activity for a number of weeks.

Of course we recognise the near term risks to emerging markets from a stronger USD (the JPMorgan EM Currency index fell 3.4 % last week, the worst in 5 years) and anti-trade and immigration rhetoric. However, it’s surely much easier to have conviction on long-term, real domestic growth than on the whims of policymakers.

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