Download Are markets anticipating a new world order?

Publication for professional investors
A brief look ahead at the market & review of key indices
Week 4 – 23 January 2017
Marketexpress
The impact of new US leadership may depend on developments elsewhere in the world.
Meanwhile, a solid global economy calls for a continued tilt towards risky assets.
Are markets anticipating a new world order?
Last Friday a new leader took over at the helm of the most powerful
country of the world, a man about whom – and by whom – much
has already been said. The reality-TV star’s ascendancy, his election
as president of the US, his choice of advisers and cabinet members,
and his still-vague policy plans have created worries around the
world about the stability of international relationships, among
other things. Some commentators have suggested that markets
may be ignoring the risks to trade and security.
an even higher level. The populist wave could spread to the
Netherlands, France and Italy and put the European Union further at
risk. The security situation in Southeast Asia may deteriorate as a
result of short-sighted and populist diplomacy by both the US and
regional leaders. The US-Chinese trade relationship could suffer from
this as well and provide a dangerously direct channel to undermine
the current upturn in the global business cycle.
Monitoring the market mood
Business and economic news continues to improve
The increased uncertainty about how the US will interact
economically and politically with the rest of the world under the new
administration might indeed justify higher risk premia in markets – all
other things being equal. But other political and economic
developments are currently unfolding that could amplify or dilute the
impact of the upcoming behaviour of US policy makers.
Markets may not be very rational much of the time, but they are
notoriously hard to outsmart. One should understand that an
inherently uncertain future always results from the interaction of
many moving parts. The underlying economy, policy and politics and
the markets themselves continuously interact to create an everchanging future.
The market never overlooks what is happening to the global business
cycle, inflation and corporate profits or defaults. On these fronts, the
news has improved substantially, even while headlines were full of
political drama. Global growth is stronger and unemployment rates
are lower almost everywhere, inflation and wages are finally moving
up and the outlook for earnings growth has brightened. One might
even argue that the recent consolidation in markets is already a
reflection of higher political risk premia, because given the direction
of economic fundamentals, risky assets deserve to drift higher.
The reality check for markets will certainly come. When it does, the
real economy might provide better guidance than the tweet-storms
or broadcasts of tumultuous press conferences. What might also help
is monitoring closely what markets are telling us on some of these
potential event risks.
The extent to which US economic growth or corporate earnings
prospects are at risk of being shocked lower by US policy will be
reflected in expectations about the future equity market volatility. A
good gauge of such expectations is the CBOE Volatility Index (VIX),
which measures the implied volatility of S&P 500 index options.
Global trade risks will be reflected most noticeably in currencies of
EM exporters that are sensitive to protectionist stances from major
developed economy importers, most importantly the US, so
currencies like the Mexican Peso or the Korean Won are a good
barometer. The market appears not to be worried about growth and
profits, but certainly seems concerned about risks to global trade if
one sees how much a Peso-Won index has weakened in recent weeks
(see chart).
Two measures of US policy risk
Not the only game in town
The US does not own the world of politics. The other regions of the
world have their own political shows that deserve close monitoring.
Europe and Asia have more than enough political ammunition to
shake the regional policy outlooks. This could happen in positive or
negative directions. A more supportive fiscal agenda could help
growth; strong electoral performances by non-populist newcomers,
such as France’s Emmanuel Macron, or by the authentic traditional
leaders like Germany’s Angela Merkel or Japan’s Shinzo Abe, could
enhance political stability.
European and Asian political dynamics could of course conspire with
US policy shocks to raise international tension and fragmentation to
Source: Thomson Reuters Datastream, NN Investment Partners
www.nnip.com
Publication for professional investors
Fundamentals still favourable for emerging market equities
The strong performance of emerging market equities that started
late last year may be surprising, given the vulnerability of emerging
markets to more US protectionism. EM fundamentals are in fact not
bad. Macro and trade data are strong, earnings momentum is
positive and commodity prices are rising. On top of that, the USDappreciation has stopped as well as the rise in US bond yields. If it
weren’t for the headwinds of political uncertainty, emerging markets
would be doing even better.
Earnings season starts with promising bank results
Last week, the earnings season kicked off, this time with the banking
sector. Their results were encouraging, helped by higher interest
income (rising yields and a steeper curve), lower provisioning for bad
loans (higher oil price and macro improvement) and lower taxes. The
outlook for the current year is also good, and the plans for US
deregulation and taxes are feeding this optimism. The US earnings
outlook for 2017 is positive, with bottom-up consensus expecting a
rise of 12% on a revenue increase of 6%. Two sectors are key:
financials and energy. This means the trend in bond yields and oil
prices will be important variables for the US earnings growth outlook.
Global earnings momentum continues to rise. Consensus growth
estimates indicate a 12% rise in earnings this year for the Eurozone
and the US and even slightly higher for Japanese companies. These
are realistic estimates and could even be revised higher depending
on rates, oil prices and the strength of the economy. For the
Eurozone and Japan the currency impact is also important.
Implantation of new US tax rules may take time
An important factor for equity markets will be new tax rules in the US
and when they will be implemented. This may take more time than
had been hoped, given the Republicans’ slim majority in the Senate
(52 to 48) and the very different impact on companies resulting from
the voting behaviour of Republican senators of heavily impacted
states. On the table are a border tax reform levying taxes on US
imports, a general cut in the marginal taxation rate, and different
treatment of overseas cash repatriation, interest expense
deductibility and depreciation. This will take time, and repealing
Barack Obama’s Affordable Care Act may be a bigger priority for the
incoming government.
The current background of solid economic data and corporate
earnings – and more talk than action in the political arena – seems to
justify the balanced view on these event risks that the market is
taking. This could easily change to a new world order of inwardlooking economic and security policies and confrontational dialogue
between the leaders of the world’s most powerful countries. For
now, though, we stick to what we know and where a strong economy
and a cash-rich investor base are guiding us to: stay tilted towards
risky assets.
Week 4 – 23 January 2017
MSCI Regional Indices (EUR)
%
13 - 20 Ja n
YTD
MSCI Worl d
-0.79
0.61
MSCI Europe
-0.92
0.33
MSCI Emergi ng Ma rkets
-0.80
2.34
MSCI US
-0.63
0.41
MSCI Ja pa n
-1.25
1.10
MSCI Devel oped As i a ex Ja pa n
-0.69
3.38
13 - 20 Ja n
-0.93
YTD
-2.04
MSCI Worl d Ma teri a l s
MSCI Worl d Indus tri a l s
0.04
-0.42
3.30
1.09
MSCI Worl d Cons umer Di s creti ona ry
-0.81
1.46
MSCI Worl d Cons umer Sta pl es
MSCI Worl d Hea l th Ca re
0.53
-1.92
0.13
-0.09
MSCI Worl d Fi na nci a l s
MSCI Worl d Informa ti on Technol ogy
-1.68
-0.36
-0.09
2.17
MSCI Worl d Tel ecom Servi ces
-0.28
0.94
MSCI Worl d Uti l i ti es
MSCI Worl d Rea l Es ta te
-0.31
-0.84
-0.85
-0.55
20-Ja n
13-Ja n
10-yr Bund (Germa ny)
10-yr Trea s ury (US)
0.42
2.47
0.34
2.38
US Inves tment Gra de Credi ts
Euro Inves tment Gra de Credi ts
3.38
0.82
3.33
0.76
Gl oba l Hi gh Yi el d
5.64
5.62
EMD Ha rd Currency
As i a n Debt Compos i te
5.66
4.62
5.59
4.52
MSCI Sector Indices (EUR)
MSCI Worl d Energy
%
Bond & Credit Yields
%
FX & Commodities
20-Ja n
13-Ja n
EUR/USD
1.063
1.066
Crude Oi l (WTI Spot, USD)
52.33
52.36
DJ UBS Commodi ty i ndex
178.74
179.06
Eurozone Cons umer Confi dence (Ja n)
Da te
23-Ja n
Cons ens us
-4.80
Eurozone Ma rki t Compos i te PMI (Ja n)
US Exi s ti ng Home Sa l es (Dec)
24-Ja n
24-Ja n
54.5
5.52M
Ja pa n Exports / Imports (Dec, y-o-y)
25-Ja n
1.2%/-0.8%
UK GDP (Q4, q-o-q / y-o-y)
26-Ja n
0.5%/2.1%
US New Home Sa l es (Dec)
26-Ja n
587K
Ja pa n Core CPI (Dec, y-o-y)
US Dura bl e Goods Orders (Dec, m-o-m)
27-Ja n
27-Ja n
-0.3%
2.6%
US GDP (Q4, q-o-q a nnua l i s ed)
27-Ja n
2.2%
Economic Releases (23 - 27 Jan)
Source: Thomson Reuters Datastream/Eikon. YTD data until 20 January 2017
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