Economic and political uncertainty continues to dominate global markets. Although the ride will definitely be bumpy over the short term, we are still finding promising long-term opportunities.
Read the transcript of this video below
Looking at the US and UK
When surveying the state of global markets, we are struck by the extent of economic and political uncertainty that currently exists.
- President Trump has been in office for over a hundred days.
- The initial market rally based on an expectation of major reforms and a more business-friendly administration seems to be running out of steam.
- This rally was led by the financial sector and was based on expectations of rising interest rates and less restrictive regulation.
- Trump’s recent failure to get Congress to approve his healthcare reforms has led some to doubt his ability to easily effect his election promises.
- The focus now shifts to the promised tax reforms and the re-negotiations of existing trade agreements.
- Sentiment in the UK is dominated by uncertainty regarding outcome of the Brexit negotiations.
- The UK officially notified the EU of its intention to withdraw last week by triggering Article 50.
- In terms of Article 50, the UK will cease to be a member of the EU two years from now and some form of agreement on the terms of this separation will have to be in place by then.
- Considering the breadth and complexity of the negotiation, this appears to be an impossible task.
- It is very likely that an interim agreement will be put in place at the end of the two years, with the details having to be thrashed out afterwards.
- The next few weeks will reveal what form the negotiations will take and the market will be watching closely to assess the strategy and tone adopted by the two sides.
- The next two years are sure to be a bumpy ride.
What about Europe?
- The EU is faced with three major challenges, namely Brexit, the still unresolved sovereign debt issues, and an apparent reawakening of nationalist politics.
- As far as the Brexit negotiations are concerned, we expect Europe to try and minimise the damage caused by the UK’s decision to leave the EU. However, at the same time they will be determined not to be seen as too accommodating to the UK so as not to encourage any of the other members to also decide to leave.
- The recent election results in the Netherlands did not fundamentally change the balance of power in that country. However, it did confirm the global trend of growing socioeconomic discontent previously seen in the UK and US.
- The looming French general election is seen as a potentially key event regarding the future direction of the EU.
- Japan is still struggling to slay the disinflation dragon and reignite growth through unprecedented monetary stimulus.
- Luckily Abe and his government remain very popular and stay committed to their strategy.
- Economic conditions in emerging markets have generally improved and this has been reflected in good performances from their equity markets during the past 15 months.
- Long-term fundamental attractiveness remains in place.
- Although higher US interest rates could act as a headwind to some currencies in the next year or two, it won’t affect the long-term attractiveness of these markets significantly.
Is there still value to be found?
- Subsequent to the rally seen in global markets since the election of President Trump, and based on current consensus expectations for earnings growth, most equity markets appear fully valued with many trading well above their long-term valuation histories.
- Should Trump succeed in pushing through most of his promised tax reforms, a second leg to the recent US equity rally is very likely.
- However, when compared to the outlook for bond markets, a convincing argument can still be made in favour of equities.
- This indicates that some caution might be advised in the short term. Nevertheless, we are still finding some very attractive opportunities on a long-term, bottom-up basis.
- Experience has taught us that well-managed, fundamentally sound companies are able to navigate almost any environment while producing above-average growth and returns.
- The key is to maintain a well-diversified investment portfolio.