Market update – politics continues to set the agenda
Quarter one, 2017
The world of politics is increasingly dominating our everyday conversations, as the significant developments of Brexit and a Donald Trump presidency have a widespread impact. Markets have not been completely immune from the uncertainty that has inevitably resulted from these remarkable political times, although so far they’ve largely fared okay.
The Trump effect slows the Dollar
When in June 2015 Donald Trump announced he was running for US President, not many people took him seriously. 17 months later, Trump was delivering a victory speech at the Hilton Hotel in New York, after defeating Hilary Clinton to become the US’ 45th President.
It was a high profile campaign – and it heralds big change in the US. One of the key reasons behind Trump’s success was his promise to shake up the political establishment and implement significantly different proposals. Before change usually comes uncertainty, which markets typically don’t react well to.
Yet the two months in-between Trump’s victory and his inauguration saw markets continue to rally, with the S&PTM and Dow JonesTM – the two leading US stock markets – and the UK FTSE 100TM all achieving record highs. Certain sectors, such as financials, have been particularly well-placed to benefit.
On Friday 20 January, Trump officially took the reins – and the President has been very quick to act on his campaign promises. Some of these actions have caused US Dollar to weaken in Sterling terms. Although markets themselves have been relatively flat so far.
Away from the White House, the other major recent development in the US has been the Federal Reserve’s decision to increase interest rates for only the second time in a decade (it’s now at a range of 0.5% to 0.75%). The Federal Reserve has forecasted a further three interest rate rises this year.
Brexit edges closer, as politicians debate the nuts and bolts
Closer to home, it remains a matter of ‘when’ – rather than the ‘if’ – the UK is going to leave the EU. In January the Supreme Court ruled that Article 50 – the notice period for leaving the European Union – cannot be triggered without parliamentary approval.
As a result, the government had to introduce a special Brexit bill that was approved by MPs following a two-day debate. Although there is still a way to go, this is an important step towards ultimately allowing prime minister Theresa May to trigger Article 50.
In the meantime, the argument rages on over the terms of Brexit. With such high stakes, future market volatility certainly can’t be ruled out. However, businesses and investors should have some notice and time to adjust.
Currency movements continue to influence returns
One of the major effects of holding the EU Referendum last year has been the value of UK Sterling. On the eve of the vote (23 June), Sterling was worth $1.49 – but two weeks’ later it had fallen to $1.28 and as recently as 16 January 2017 was as low as $1.20. Of late it has shown signs of recovery.
Weak Sterling has been a positive for some UK investors – particularly those who hold global assets. When overseas gains from market rises have been converted back into Sterling, the favourable exchange rate has further improved those returns.
For example, when measured in UK Sterling, the MSCI World Index (which tracks leading equities across 23 developed markets) delivered a 2016 return of 28.2%. When the MSCI World Index is measured in local currency, the return was 9%.
The sharp decline in the value of Sterling was also a positive development for UK companies who export their goods and services, or who have business operations overseas. This is because prices have become more attractive to overseas importers, potentially boosting export volumes.
What lies ahead?
- Inflation will be one of the themes of 2017. The National Institute for Economic and Social Research (NIESR) predict the UK’s Consumer Price Index (CPI) could quadruple to about 4% by the second half of 2017 – a figure last seen in 2011.
- Several high profile elections take place in Europe this year. France, Germany and Netherlands are the most notable countries, with the terms of Brexit as much of a focus on the continent as they are in the UK.
- Donald Trump’s first 100 days in power reaches its conclusion on April 29. The end of the first 100 days is widely seen as the point where we will all have a more rounded idea of the approach he will take for the next four years.
- Brexit negotiations will continue to dominate the headlines. In many ways the triggering of Article 50 in March is not the end, but the beginning. It will start a clock – lasting up to two years – for the government to negotiate favourable terms with the EU ahead of actually leaving. The implications of these discussions could be huge, and a bumpy path may lie ahead.
Mark Elliott, Head of Technical Research
For all the noise around it, 2016 was largely a good year for global markets. They have proven to be resilient to the political uncertainty that continues to be such a big feature right now. Many UK investors have been rewarded by solid levels of returns.
That said, Brexit, Donald Trump and European elections could see more twists and turns, and in the short-term at least they could have a telling influence on markets. It would not be a shock if volatility was to increase.
Experienced investors will know it’s important to not let short-term bumps unduly concern you. By keeping your eyes on the bigger picture, and making sure your financial plans remain right for your needs, you can remain on track to achieve your long-term goals.