16 to 22 January: When the Rubber Hits the Road

Since the 8th November US elections, there has been a sharp acceleration (and in some cases reversal) of asset price moves and market expectations; bonds lower and equities, sentiment surveys and inflation expectations higher (to multi-year highs). We don’t think this is all about Trump. The global economy rebounded in Q4, led by a manufacturing recovery, whilst the US is now arguably at full employment, which creates the potential for a faster FED rate hiking cycle. Nonetheless, as the Mexican Peso attests, Donald’s victory certainly played an important part. The first few weeks of his leadership therefore have the potential to be significant for markets.

We think the global economy has positive momentum that should provide a tail-wind over the next few quarters. However, with respect to the US, additional fiscal stimulus is priced and concrete steps towards government investment (at a 60 year low as a percentage of GDP) and corporate tax review (3rd highest rates in the world) are required to justify the excitement. Moreover, we reiterate our concern that the new Presidency will instead be associated with on-going unpredictability and a primary focus on a divisive ideology. NYU Professor Nouriel Roubeni this week tweeted “Trump Carnage: Protectionist, Nationalist, Isolationist, Unilateralist, Xenophobic, Nativist, Chauvinist, Angry, Depressing “America First”, whilst ex Treasury Secretary Larry Summers commented “My objection is not to disagreements over economic policy. It is to enabling if not encouraging immoral and reckless policies in other spheres that ultimately bear on our prosperity.”

Certainly, politics is likely to prove an increasingly important determinant of relative performance across asset classes, sectors and regions. In terms of the aggregate picture, then it seems to us still more likely that we are seeing a “growth and inflation scare” rather than the start of a full-blooded change in economic paradigm. This is to say, we certainly do not see enough to persuade us of a fundamental shift away from structural stagnation (lower growth). There is perhaps slightly more risk of inflation (both from cyclical positioning and protectionism) – albeit on balance, we expect the dominance of easy monetary policy to continue.

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