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Opposing forces

05 April 2017

The continued global economic recovery was more than matched by equity markets, while politics remained the wildcard, reports CIO Chris Ralph.

Investors could take considerable delight in the trajectory of the global economy in the first three months of 2017. Figures released in February showed healthy progress across leading economies, as global growth gained momentum on the previous year. Among the major economies, Germany led the way, followed by the UK, the eurozone, and the US.1

In 2016 there had been concerns that the growth rate might prove unsustainable, given the lag in corporate earnings during the first three quarters. Yet the New Year brought much-improved US company results too, suggesting that the private sector is generating the growth, as it should do.

Policies, or promises thereof, could take some of the credit. The energy sector was helped by the sharp oil price rise of late 2016, but received an extra boost from the election of Donald Trump, who has vowed to deregulate America’s energy sector and make it extract oil and coal alike. Non-US oil majors also had a good quarter, among them BP, Shell and Total.

The financial sector also received a double dose of help. The new president pledged to dismantle recent banking regulations. Moreover, expectations of higher interest rates rose – bank profitability should benefit. Having raised rates last December, the Fed offered a further rise in March, and indicated two more to come later in the year.

The Fed may well be blazing a trail for central banks elsewhere, too. In the UK, inflation struck 2.3% in March, making an interest rate rise more likely than a drop in the year ahead, and hitting cash savers hard. In the eurozone, meanwhile, although inflation only rose to 2%, it was enough for Mario Draghi to change his tone – some tapering of the ECB’s quantitative easing programme looks plausible in the near term. Eurozone business sentiment struck a six-year high in February.

The improving outlook, including the tailwinds for oil majors and financial companies, helped to deliver significant growth for stocks over the period. In the US, the S&P 500 rose 6.1%, although it was the Dow Jones Industrial Average which provided the headline news, rising above 20,000 for the first time. Meanwhile Apple, the world’s biggest stock listing, helped deliver stellar quarterly returns for the tech-heavy NASDAQ index.

The FTSE 100 enjoyed a buoyant first few weeks of the year, and rose 3.7% over the quarter, despite mixed corporate results. The UK also saw two highly significant proposed takeovers jettisoned: Deutsche Börse will not acquire London Stock Exchange; nor will Kraft Heinz buy Unilever.

The Eurofirst 300 rose by 6.1%, reflecting improved sentiment in the eurozone; but Japan’s Nikkei fell by 1.1%, buffeted by moves in the yen and concerns over stalling economic and corporate reform.


While markets and economies appeared to be on a growth trajectory, the direction of politics offered a number of major uncertainties – and potential economic headwinds. In the US, Donald Trump imposed a short-lived travel ban on visitors from seven Middle Eastern and African countries, withdrew the US from the Trans-Pacific Partnership (a 12-country trade deal), and failed to steer his healthcare reform package through Congress. The last of these raised questions over his ability to deliver on his pledge of tax cuts.

In the UK, the prime minister used a speech in January to lower hopes for continued single market membership. TheCityUK, the square mile’s leading lobby group, gave up its fight for access the same month. Theresa May then triggered Article 50 at the end of March, marking the start of EU exit talks. Her chancellor may have been glad of the timing, as the move overshadowed a March Budget whose weightiest measure was cancelled following backbench uproar.

Over the quarter, the focus of the globalist-protectionist dispute shifted from the UK and US to Continental Europe. Globalists chalked up a comfortable victory in the Dutch elections, but are still nervous about the forthcoming French presidential election, although Eurosceptic Marine Le Pen lags the favourite, Emmanuel Macron, by some margin.

Despite solid global growth and stock market gains, it is likely the quarter will be remembered for one event: the triggering of Article 50. For the UK, the course of the year ahead may be strongly directed by that signature moment.

1 Reuters, February 2017


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