Markets, News, Views, Commentaries… (Nov 2016)

The shock victory of Donald Trump in the U.S. presidential election is still working its way through the financial markets. One important impact has been immediately higher bond yields, which has led not only to capital losses for bonds but also losses for “bond surrogate” assets such as property and infrastructure. Equities have been less affected, principally because of an expected fiscal boost to the U.S. economy. The fuller implications of the Trump presidency will take some time to become apparent. In the meantime, the global economy has been showing some signs of a modest pickup in activity, while at home, the economy still looks to be growing at a slower-than-usual rate, though there is a realistic prospect of faster growth in 2017.

The Australian dollar has weakened in the wake of the U.S. presidential election, largely reflecting the global post-election rise of the U.S. dollar with the Australian dollar dropping from USD 0.77 on election day to USD 0.755 at the time of writing (21 Nov).

The Australian sharemarket has struggled to make ground all year. There have been periods where shares have performed well (April/May, July) but each rally has petered out, and the market has ended up effectively all square for the year in terms of capital gains. The heavyweight financial sector has remained the biggest drag on performance, and is currently showing a 7.6% capital loss. The sheer size of this sector and its presence in investor portfolios means the drag has been felt in all but ‘small company specialist funds.

Looking ahead: one positive outlook came from credit agency Dun & Bradstreet’s latest survey of business expectations which, for the March quarter of next year, showed a world where: “The economy is ending 2016 and moving into 2017 on a positive note. Business expectations for future sales remain upbeat and this has flowed through to a particularly buoyant outlook for profits. If these expectations are met in coming quarters, it is likely that the economy will be growing at a 3 to 3.5 percent pace, which would represent one of the strongest growth phases for Australia since the global financial crisis.”

The official data shows a more downbeat picture, so let’s hope business optimism proves more accurate……

Overseas, the news Donald Trump had been elected U.S. president came as an enormous shock to many financial markets, and the bond markets were no exception. While investors might have expected (or hoped) that a surprise of this magnitude would have led to a “flight to safety” into government bonds (and so to higher prices and lower yields), precisely the opposite occurred and U.S. government bond yields rose markedly.

Because U.S. yields affect the relative attractiveness of other countries’ bonds, there were knock-on effects in other markets, though ongoing easy monetary policy in the Eurozone and Japan meant the impact was modest.

Global shares reacted a little differently though and once the immediate surprise was absorbed markets turned their mind to the likely policies of a Trump administration and had an entirely different reaction. Fiscal policy, in particular, was expected to turn more supportive of economic activity, and share prices benefited.

At this point, forecasters are only beginning to revise the immediate outlook for the U.S. economy. The November Wall Street Journal poll of American forecasters, taken immediately after the election, showed forecasters had not yet made any change to their expectations for GDP growth in 2017, which remained at 2.2%, but had raised their expectations for 2018 from 2.0% to 2.3%. The likelihood is that there will be more revisions upwards in coming months. The exact numbers may be secondary: the more important takeaway is that forecasters have changed their view from an expected slowdown to an expected acceleration in the U.S. in 2018. The recent rise in U.S. equities may well be accurately signalling a turn for the better in the near-term outlook for American corporate profitability.

GDP Growth – World graph


Sources: Morningstar research/Economic Update November 2016; RBA, Bloomberg.