Following the the political fallout following the referendum and the recent action by the Bank of England, MWM are pleased to bring you our latest market commentary covering quarter ending 31/12/2016.
In this instalment we look at the impact of:
- Political changes in the UK, the EU and the US.
- Banking sector
- An update on oil prices
If you would like to discuss this market update in more detail, please do not hesitate to contact your usual MWM Financial Planner.
A surprise result in the US Presidential Election but some familiar global issues nonetheless Global equity markets generated positive returns over the quarter as investors speculated that President Elect Trump’s surprise victory in the US Election might ultimately benefit US economic growth. US equities made strong gains as economic data continued to indicate that the US economy was improving. Emerging market economies, which had started 2016 in good form, suffered as the US Dollar went higher based on the improving US economy.
Politics continued to be the driving force through the fourth quarter with the anti-establishment vote proving victorious in in both the US and Italy. President-Elect Trump’s victory raised fresh concerns over Europe’s political and economic stability. The prospects of higher growth and inflation accelerated the recent rotation into interest-sensitive and commodity-related sectors of the market, with financials, and energy gaining and defensive sectors declining.
Bond markets experienced a challenging period with broad losses across the asset class. The sell-off in bonds highlighted the belief amongst investors that a Trump Presidency would likely result in an expansionist policy programme, leading to inflation and with it, future interest rate rises.
In other news
Bond markets slump
In recent weeks, investor expectations for inflation and interest rates have risen quite rapidly. This has partly been due to the prospect of post-election fiscal stimulus in the US (infrastructure spend and tax cuts) and partly due to a recovery in commodity and energy prices. Thus, bond prices have fallen and there has been a rotation in the stock markets towards financial and commodity stocks. At the same time, the share prices of many predictable dividend payers have fallen back due to their perceived similarities to fixed coupon bonds.
Market participates are concerned that this is the start of the great bond rotation, however in reality, the extent of future bond losses is very much dependant on how rapidly inflation rises and how aggressive central banks are in raising interest rates. Although inflation is rising, wage growth remains historically low and needs to rise significantly to create widespread inflationary pressures over the longer term.
Good news elsewhere in the Banking sector
Banking shares in the US, Europe and Japan delivered strong returns over the quarter, marking a change of fortunes, as the sector was previously characterised by low profitability, low interest rates, weak balance sheets and strict regulation. Sentiment for these institutions quickly improved following the prospect of inflation and higher interest rates providing them with a higher level of profitability. This could continue in 2017, particularly as company valuations are extremely low.
Oil prices aren’t just about OPEC
In the commodity arena, OPEC reached a historic agreement to cut oil production for the first time since the global financial crisis. However, we are witnessing the return of the US shale oil industry and the conflictridden nations that were left out of the output cut agreement. Both could have an impact on global oil prices in the near term. Also, market participates will assess the OPEC agreement over the coming months as it remains to be seen whether these nations will fully commit to their pledges. Alongside oil, industrial metals such as zinc and copper also climbed on hopes that stronger global growth would underpin demand.
Brexit still looms large
Sterling lost ground after the Bank of England kept interest rates on hold and revised down its inflation forecasts. The Bank of England will remain sensitive to any slowdown in economic activity next year, with real income growth squeezed by rising inflation and Brexit uncertainty continuing to impact corporate investment plans.
While UK employment remains relatively healthy, wage growth remains muted, growing at roughly half the pace that was typical before the financial crisis of 2008. It’s likely that companies will look to clamp down on workers’ pay over the coming months as they strive to manage costs as prices of imported goods rise following the devaluation of Sterling. There is also the matter of what Brexit means for the future of the Euro with France, Holland, and Germany holding elections in 2017.
A wave of populism continues to surge through Western societies. The Brexit vote was followed by the dramatic election of Donald Trump to the White House and the rejection of constitutional change by Italian voters. Despite all of this this, the reaction of equity markets was largely favourably. Economic data is improving and company earnings appear to have stopped falling. The one-quarter point rate rise pushed through by the US Federal Reserve shows that confidence in the US economy is building and this is likely to ripple through to the global economy.
The Trump fuelled rally continued into December, with the prospect of higher growth and inflation in the year ahead as the anticipated fiscal stimulus is implemented. However, it of course remains to be seen quite how much of President-Elect Trump’s campaign policies will be implemented. Furthermore, President-Elect Trump’s victory has produced a stronger dollar which looms over multinational US companies, offsetting any cuts in taxes and regulation.
For now, the equity market rally continues and is supported by improving fundamentals. How sustainable this is given the level of geo-political events in 2017, remains questionable. Politics and the volatility that this brings looks set to stay.
About Menzies Wealth Management
Menzies Wealth Management is a subsidiary company of the Menzies Group, providing independent financial advice to both private and corporate clients. We are independent of all financial institutions.
This document (market commentary) is intended for general information purposes only and does not constitute advice. It is based on our current understanding of legislation, which may be subject to change. Menzies Wealth Management can accept no responsibility for any loss resulting from acting or refraining to act as a result of any material in this publication. Past performance is not a guide to future performance and the value of investments may fall as well as rise. Personal taxation will depend on individual circumstances. The Financial Conduct Authority does not regulate taxation and trust advice, or some types of mortgage.
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