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True Partner article: 2017. And Now for Something Completely Different

Page 3: True Partner Fund - Volatility update 01-2017

As the impact could vary across different geographies, we will take you around the world markets touring the various potential flashpoints similar to last years’ update.

US: Impact of Trump will be ‘Huge’

Regardless of ones opinion on President-Elect Donald J Trump, one thing is certain. The impact is going to be ‘huge’. But it remains to be seen which parts of the agenda will actually be enacted. Will the GOP-dominated Capitol pull a ‘2009’ where the massive tax cuts will be implemented, but the fiscal spending will be blocked? Will the investment program be implemented at the expense of other budget items, or will debt spiral upwards to a level certain to awake the Bond Vigilantes of the past?

The markets seem to point at the latter, judged by the sharp rise in US interest rates. To the extent that one subscribes to either ‘trickle down’ or Keynes, US equity markets have room to continue their rally. On the other hand, those who have rallied behind the necessity of low rates to stimulate the economy should be quite worried. Mortgage rates, to name just one example, have increased over 50 points since November 8th. It is interesting to note that the ‘losers’ of the Trump presidency appear to be the very same FANG stocks that have catapulted the S&P 500 and Nasdaq 100 towards their highs earlier this year.

But as there are so many moving parts, the only certainty appears to be the continuation of uncertainty and mutability. Arguably, the President-Elect’s character is inherently more volatile than that of the outgoing President, which seems inevitable to manifest itself in US government policy as well. However, the US economy was in relatively good shape going into November, so the de-facto engine of the global economy remains in a bit of an enviable position, compared to other markets.

UK: A Painful volatile divorce

Traveling East, the United Kingdom is not so lucky. The clearer it becomes that the Brexit vote was not necessarily an economic one, but a social one, the consequences are increasingly deemed to be negative. Recent data from OBR (non-partisan Office of Budget Responsibility) reflect a net negative impact exceeding GBP 200 million per week. A red bus springs to mind for the keen observer. While the FTSE has recovered, it would be the Dollar/Pound exchange rate that is an actual gauge of the UK economy. That is still down significantly (or should we say ‘bigly’).

And as in the US, the process is just getting started. Official divorce talks are set to start in the spring of 2017 with the invocation of Article 50, but knives are being sharpened on either side of the British Channel. The big price will be role of Europe’s financial capital (i.e. passporting rights for UK located firms) but in true form, where two dogs fight for a bone, a third one might snatch it. If talks break down, it will not as much be Paris, Frankfurt or Dublin who will benefit but New York City.

Expect continued volatility in the UK when the longer term effects of devaluation of the Pound start to sink in and as other unresolved issues reach the surface, for instance in Northern Ireland and Scotland. It may seem far-fetched, but because of that significant volatility would also occur should Article 50 not be invoked.

EU: Dents in the european project

On the opposite side of the Channel, the Eurozone is looking continuously grim. Economic growth is dismal and inflation refuses to pick-up while dissatisfaction at the ECB policies mounts. In line with Anglo-Saxon populism, the mandate of Draghi is under fire with ‘exit’ movements gaining traction across the richer North. While French presidential hopeful Fillon would not be as toxic as Le Pen from the far right, his views are hardly constructive for European integration. A looming set of contested elections (next to France, The Netherlands and Germany are worth observing) could further dent the European project. Or will it be the Italian finances that ring the death knell.

As the main European indices reflect a more global set of companies, it might be the uncertainty over the European project reflecting on the Euro that drives volatility for this part of the world. The Eurozone could do well without the added uncertainty of Brexit, and there is bound to be plenty on the plate of the rotating EU presidency. As luck would have it, for 2017 this role is to be taken by experienced heavyweights from two core countries, Malta (H1) and Estonia (H2)…

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Published by Ralph van Put

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