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Attached is the January edition of our CIO Pack. It summarises the macro and the market environment. We highlight 10 charts from the ASR research team for the month.
• We believe that a Trump Administration will seek to change the fiscal-monetary mix. The expectation is for slacker fiscal, tighter money, higher real yields and a higher dollar. But the mistake may be to expect a classic Keynesian response: ultimately it is the private sector that will end up saving less and spending more.
• The consensus is that slacker fiscal and tighter monetary policy is US dollar positive. But the 1980’s template for this view neglects that then the priority for the Federal Reserve was to control inflation. The US dollar may be resilient in the short term, but Trump’s goals are more likely to be delivered via a 30% decline in the USD real effective exchange rate over the next four years than by a stronger currency.
• We suspect that Trump’s initiatives will boost 2018’s growth rather than 2017’s. In the short term, we could see inflation forecasts increase more than those for growth. 2017 could be more stagflationary than reflationary, with negative implications for equity valuations.
• It is too early to conclude that the great bond bull market is over. We need to see US 10yr yields breach 3% and trend nominal GDP growth to trend higher. Trigger for higher yields might come from the ECB / BoJ curtailing their QE programmes.
• Equities are likely to tread water over the next 12 months even if they do beat bonds. Multiples could be capped by the unfavourable inflation-growth mix. Policy uncertainty remains elevated, but the US ERP is not. And Trump’s foreign policy agenda could present a real challenge to US businesses committed to long-supply chains. The sector rotation we have seen has already discounted a growth surprise that may not materialise in 2017.
Change, not continuity. Markets have sniffed the scent of regime shift and yesterday’s winners are losers today. We do now see valuations as having a role to play in the investment process. However, until we are more confident on the delivery of stronger growth, it isn’t yet ‘all-in on the cycle’. Instead the focus is on selective value and believable growth vs. Min Vol and bond proxies. Capex was a casualty of the long bond bull market. The pendulum can now shift from distributions to capex, and spending on business growth.
PODCAST: Listen to Zahra, Charles and Phil on themes for 2017
Theme I: Relative Valuations Could Make a Comeback, by Zahra
Theme II: Min Vol to Diverge from Quality, by Charles
Theme III: Pendulum to Swing from Distributions to Deflated Capex, by Phil
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