As much as we would prefer to discuss market fundamentals over the trials and tribulations of the current US Administration, it has been largely unavoidable in this first quarter of 2018.
Markets continue to come to terms with the return of higher volatility, triggered ostensibly by fears of inflation and the unwinding of highly leveraged short volatility positions at the beginning of last month. To this list we can now also add the spectre of increasing protectionism and outright Trade Wars.
In our 2018 outlook, we made the case for rising volatility as central banks across the developed world slowly remove the stimulus punch bowl, but few would have imagined volatility spiking with such a vengeance as it did in recent weeks.
Over the past few years, one of the main risks that concerned our team was the possibility that asset classes could become positively correlated. In 2017, we saw the positive correlation story start to play out in the best possible way, with strong positive returns across the board.
Could this be taper tantrum 2.0? Markets are well-conditioned to buy risk on the back of generally dovish encouragement by central bankers, but what are we to make of this new seemingly coordinated hawkish tone across the developed world?
What does it mean to be a value investor? This question is all the more relevant today. The S&P 500, NASDAQ and Dow have all hit record highs as of the time of writing. US equities ranked as one of the most expensive equity markets on our valuation models at the end of last year. Yet they have risen a further 10% since.
Macron is the next President of France – finally, a win for the establishment. Macron took 66% of the votes over Le Pen’s 33%, but is this a mandate against populism? We do not think so, as the disenfranchised class is already formidable and will only continue to grow until there is, in fact, change or the establishment is fully toppled.
With Donald Trump’s victory in the US presidential elections inNovember 2016, the Republican Party succeeded in consolidating control over the White House, the Senate and the House of Representatives. This stoked expectations that meaningful legislation and reform would soon follow, in contrast to the troubled partisan years of the Obama administration when neither party was in control of all three arms of the government. However these expectations have rapidly faded over the last few weeks.
The Trump reflation trade may have lost some of its shine during the quarter, but any disappointment was more than overshadowed by strong global data as exports and production continued to gather pace. In fact, fading enthusiasm for Trump’s ability to execute has arguably served as a tailwind for Emerging Market (EM) assets in the form of a weaker dollar and moderating long term rates.
2016 may best be remembered as the year in which Trump won and the world changed. The question becomes which reforms will take centre stage.