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2 March 2017

Finance & investing wrap – February 2017

By Clive Hale, director

Trumponomics, Trumpomania, Trump on Twitter… since last November, the Trump headlines and the market moves have been relentless. As we write, the US stock market index—the Dow Jones—has had an unprecedented 12-day sequence of higher closing levels. The UK and European markets have followed suit.

We take a look at the key events you need to know about, region by region, in March.

United Kingdom

In the UK, the FTSE 100 index, in particular, has been attractive, apparently as a result of sterling’s weakness translating into higher income for dollar earning companies. Eventually, someone will ring a bell and remind folk that currency weakness is a double-edged sword and our imports will be rising tout de suite.

UK consumers have not really experienced incipient inflation since the 1970s and anything impinging on their spending habits will have a negative effect. Apple iPhone prices in the UK have risen by over 10% so far and some of the company’s music apps by 25%. And of course Marmite is becoming a luxury item too.

Brexit is still in the forefront of the news, as the Lords have passed an amendment requiring the government to guarantee the status of foreign nationals residing in the UK. The government have disingenuously suggested that the best way for them to be reassured is to get on with the triggering of Article 50. One wonders who will build the new runway at Heathrow, the HS2 line and the new nuclear reactor at Hinkley Point. We have a skills shortage that can only be addressed in one way in the short term.

Sterling is still very weak but has traded sideways for 5 months now. A break below $1.20 would be ominous, above $1.27 would almost certainly require a rate rise here as well as in the US.

The UK economy has yet not collapsed into a pile of rubble following the Brexit vote, but then it is not where it should be either, given the amount of taxpayer money that has been thrown at it and the length of time since the great financial crisis was allegedly over. The same comment can be levelled at the US, Japanese and most European economies.

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Europe

The way ahead is as unclear as it was last month, but the elections in Europe are getting closer and we will have our next pointer on March 17, when the Dutch vote. Geert Wilders’ right wing ‘Party for Freedom’ is ahead in the polls, but a long way from any absolute majority with 28% of the vote. In France, where the elections are just over a month later, Marine Le Pen’s party, Front National, is in a similar position. She will get through the first round, but then the battle will start in earnest. If the eurocrats lose this one, the European Union may find itself at the beginning of the end – or, more likely, the end of the beginning.

On the other hand, there have been some small rays of sunshine on the economic front, but activity is still a very long way off being strong enough to be properly called a recovery. The European Central Bank is now the largest single owner of European government and corporate debt. Unlike the Swiss and Japanese central banks, it has not yet resorted to buying equities, but that may well be their next plan.

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United States

With a US rate rise now almost a certainty after Trump’s latest speech—which promised heroic spending on infrastructure, the military and tax cuts (while being short on detail on just how all this will be funded)—a stronger dollar is still a possibility. Trump doesn’t want that, but the US federal Reserve is flexing its muscles as it has long been after a fiscal stimulus, but not with ever higher spending.

We still believe that the equity and bond markets are significantly overvalued. Volatility has been ‘put to sleep’, which is a worrying development. Market manipulation is evident every time the markets start to sell off. This can’t go on forever.

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Japan

The Nikkei continues to trade sideways. A move above 21,000 in the index could see some significant upside. This would require a continuing weakness in the yen, implying dollar strength that may arise if the US do press ahead with the three interest rate rises they have scheduled for 2017 – the first of which may happen this month.

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Asia Pacific and emerging markets

Potential dollar strength and the threat of Trump mercantilism are the danger signs for these markets, but the trend is still up and the Asia Pacific index has made an encouraging series of high lows and higher highs.

Longer term, the growth potential relative to western markets is significant, but in any emerging market, tomorrow’s winners won't be those of today. A market where active managers are a must.

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Commodities and gold

The crude oil price remains firm and is establishing a trading range between US$50 and US$60. It could edge back up to US$70 on concerns over Trump’s foreign policy, which would add to the inflationary impetus and the rise in interest rates.

Gold is enjoying another gentle rally, again buoyed up by the uncertainties about just where the US is headed in terms of trade, immigration, interest rates, foreign policy … in fact pretty much everything. A move above the 2016 high at US$1375 would be very good news for the gold bugs.

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Bonds

Bond yields have turned down in the US. The ‘Fed lady’ has yet to sing with any volume, but another move up in yields, down in prices, may get her on to the stage. European markets are still in thrall to the European Central Bank. The bank’s president, Mario Draghi, very quietly mentioned tapering in January, but no one seemed to notice!

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Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own and do not constitute financial advice.

©2017 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.