‘Opportunities are like sunrises. If you wait too long, you miss them’ – William Arthur Ward
Happy New Year…that is unless you are an investment or political risk strategist in which case the dawning of 2017 should be dubbed an ‘Unhappy New Year’.
The average stock market investor is probably scratching their head about all of this with the FTSE 100 and various US indices kicking around all-time highs and stock markets in Europe moving into a bull market zone twenty percent plus above previous lows. However there is a tradition of august commentators unveiling learned reports at face value anticipating doom, gloom and near financial apocalypse.
Typically by the end of the year they are wrong and the same will be the case in 2017. Let’s take the top three gloomy scenarios and explain why this is the case.
Scenario #1 – the debate around Brexit nobbles the UK economy and the European Union moves ever-closer to a break-up. Suffice to say the Pound and the euro will be deeper in the currency trash can…
Like or loathe everything around European trade and co-operation the practical reality is that we are in serious ‘muddle-through’ territory at the moment. The ripping-up of existing trade relations is a massive lose-lose for everyone and hence even with Article 50 we can look forward to another year of Brexit delay.
[graphiq id=”lJcuG9FcUzX” title=”YouGov Poll: The Economy Post-Brexit” width=”600″ height=”516″ url=”https://w.graphiq.com/w/lJcuG9FcUzX” link=”https://www.graphiq.com” link_text=”InsideGov | Graphiq” ]
Meanwhile policy stimulus continues and as the early January Purchasing Managers Index economic data both sides of the English Channel has already showed a bit of momentum is apparent – funny what happens when you slash interest rates and related.
Meanwhile neither the France nor the Netherlands will have populist leaders, Italy has too many debts to do anything but stay in the European Union and Mrs Merkel will cap the year off by being re-elected in Germany.
All of this means that those global investors who surveys have shown have placed respectively the Pound, UK assets and the euro as their top three most underweight investments are going to have to eat a bit of humble pie and buy back in. That pushes the Pound and euro up.
Scenario #2 – President-elect Trump goes isolationist and protectionist. Global doom follows.
At one level I am still amazed that he won but the key for understanding ‘The Donald’s’ political and economic strategy post 20 January is to look at his business dealings over the last generation or so.
The current crop of proxy government by Tweet smacks of the same use of provocative headline business statements…and then a practical rowing back to do the deal. Of course this feels grubby to political commentators who have been schooled in ‘a proper way to do things’ as shooting from the hip belongs more to the era of the Wild West.
The reality is that Trump talks big but carries a little stick and this is because a good chunk of US debt is owned and bought by the Japanese and the Chinese. Now the former will play ball but the latter…are a group of pragmatists too.
Whilst all the talk today may be of closer personal relations with Vladimir Putin of Russia in four years time all the chat will be about a realist, rumbustious relationship with China. They buy the debt in exchange for the dollar not being too strong…which also aids Trump’s biggest political thrust: more jobs in America.
Scenario #3 – China catches a cold. The world catches something far worse.
I have a rule of thumb that if I am going to criticise the economic backdrop in a country…then I need to have visited there first. Today’s ‘internet research’ induces a different range of responses though and – once again – fear levels about China are at fever pitch.
Above I discussed the reality of a pragmatic Donald Trump doing deals with the Chinese and hence all those fears about a crippling Chinese exchange rate devaluation cascading through the emerging markets and global trade can quietly go away.
Meanwhile on-the-ground efforts by the Chinese authorities to enact critical added flexibility inducing reforms continue apace…and it is in these areas that everyone should be looking. My judgement is that initiatives here are far more impressive in terms of change than anything currently be enacted in the Western world and that bodes well for a continuing shift of the Chinese economy to a more consumer oriented focus – which is good for the rest of us.
Now I am no wide-eyed perma-optimist as there are plenty of expensive shares out there already but applying the above and buying the Pound and the euro, domestic plays in the UK and on the Continent and keeping up your emerging market weighting I believe will make you money in 2017. Especially if you do it when others are fearful…and you are greedy.
So, Happy New Year.
Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.
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