At last the US election is over, as is the total uncertainty that came with it. Now, increasingly, all the various fears over unpredictability and a new wave of protectionism should subside. However, even on November 9, the markets were already beginning to reflect the fact that Donald Trump was offering the prospect of an investment-friendly policy with a favorable tax environment and fewer restrictions.
In general, the financial markets have been relatively calm since the summer months. All the structural issues that were previously causing concern or that even triggered shock waves have been virtually forgotten. Surprisingly, the markets also seem to be taking the debt crises on both sides of the Atlantic in their stride, even though in terms of structural conditions more problems have been papered over than actually resolved. In fact, the situation may become further aggravated by the much-vaunted return of fiscal stimulation. All in all, the impact of geopolitics and structural factors is currently very limited.
Against this backdrop, economic prospects also appear to be quite robust: although growth in the global economy is modest overall, the outlook has brightened significantly. The US economy has gained traction, and there is a good chance of a classic boom. Europe’s economy is also on an upward trend, having shrugged off the Brexit verdict, which even in the UK has had no serious impact on leading indicators. In the emerging markets, there is at last some light on the horizon, despite potential headwinds from the USD, higher US interest rates and “deglobalization fears”. This conclusion is supported by the relevant leading indicators, which are now in positive territory in almost every emerging region, and no longer just in the developed markets.
Following the US Federal Reserve’s second rate hike, the monetary divergences, which had diminished for a while, are about to re-emerge: in 2017, the phenomenon of monetary policy decoupling will become more pronounced. Meanwhile inflation expectations are once again entrenched in their long sideways trend, and the big picture remains that of deadlock between deflationary pressure and inflation potential. That said, the baseline effects of oil and commodity prices are providing some cyclical momentum. In our global baseline scenario, the outlook is for more growth and more inflation. In the more unlikely risk scenario, an economic setback with slightly stagflationary tendencies cannot be ruled out. In this environment, we continue to recommend a very “sporting” tactical positioning.
Author: Dr. Alex Durrer, Head Economic Research, LGT Capital Partners