With the Fed’s official recognition that the path to rate normalization will be slower than they originally put forward, markets have shrugged off their “blues”. A weaker dollar is helping in several ways: commodity prices, a potential (small) support to inflation and emerging markets relief. Beyond this short-term boost, however, there are important milestones to remember on the “long way to November”. These could bring surprises or material events with long lasting impact along the way and more market and currency volatility. This will serve stock pickers who remain focused on quality.
The global economy is in a fragile state. The low-growth/low-rate duo will continue to force structural adjustments that nations are reluctant to consider as necessary or permanent. These adjustments are taking place at a time of heightened geopolitical volatility, which in itself is partially the result of the ongoing disorder emanating from frictions in the adjustment process.
Top 5 things to watch before November:
1) Politics: more earthquakes and tremors to come The rise of protest votes is everywhere to be seen in the West. Trump’s ascent is a clear result of this phenomenon, but in Europe the rise of radicalism continues unabated as discussed in our November 2015 report “Paris Attacks - A Turning Point”. From the rise of the likes of Petrie in Germany and Le Pen in France, the “protest vote” is reaching an increasing proportion of European countries, including: Sweden, Finland, Poland, The Netherlands, Austria, Hungary, Italy and Greece. Like the “frog” in the pot who does not feel the slow rise of the water temperature, the west could be surprised by the “earthquake” those protest votes bring, especially in light of mediocre economic growth and the weakening of Angela Merkel. The increase in far-right parties also plays in favor of Putin as his propaganda machine already loves to portray the West as “fascist”. This in turn provides support for him to act more boldly and possibly divide Europe further.
At the heart of the protest votes are three key issues: first, the emigration issue that Europe is facing; second, the Middle East instability; and third, the weak global economic environment.
2) The European migration crisis: Migration is one of the constant key themes in history and flows have always been linked to traumatic events. During the past 15 years, international migration has continued to grow, with the number of international migrants reaching 244m in 2015*. The total number of refugees is the highest on record in 2015 and Turkey has become the largest refugee-hosting country, along with Pakistan and Lebanon. More than half of the refugees came from three countries: Syria, Afghanistan and Somalia. The difficulty in finding a sustainable and appropriate solution to the current migration crisis is not only linked to the fragile European economic landscape, but is also putting pressure on two key existing fractures – namely the weakening of the European political project (and possibly its resolve); and the difficulty in reaching a coherent response due to shifts in the global geopolitical landscape with instability in the Middle East at the core of it.
3) Geopolitics: “Turning tables” The massive geopolitical shifts underway stems from the conjunction of 3 major factors: first, the long lasting failure of the international community in engaging productively to alleviate some key regional pressure points such as the situation in the Middle East; second, the emergence of new players (such as China) altering the global balance of power; and third, the economic shift linked to weak oil and commodity prices.
The Middle East seems to be the center stage for proxy wars. The speed of radicalization and the lack of regional leadership on how to deal with extremist organizations has increased since the Arab Spring. This has created a diffuse and very complex problem with consequences that Western leaders find very difficult to tackle. The inability of the Middle East to deal with the ancient Sunni-Shia power-struggle is being exploited in the proxy wars unfolding and giving scope to extreme groups to exploit disorder**. Financially, the shift in power linked to weaker oil prices and technological revolution has also been instrumental in inflaming old alliances in the Middle East and the established wealth base (including in Russia) . With regard to Russia, Putin has turned out to be much more “troublesome” for Western leaders than they thought he would be 10 years ago. It seems clear that his “bold moves” (Syria, Ukraine, Crimea) are commensurate with the ongoing Russian economic weakness and the management of his electorate - with the ultimate goal - it would seem - to show how strong Russia is in the world.
4) Brexit This is a key issue to watch over on the next 3 months. An exit might be closer in the balance than most expect and will have important consequences far beyond trade deals and passporting. Politically in particular, it will have internal and external consequences that could create volatility in the currency and capital markets. Who needs another political campaign so close to the last one? A political crisis in the UK would not bode well for Europe and the Western world.
5) US Elections While it seems clearer every day that the final round will be between Donald Trump and Hillary Clinton, the volatility around the rhetoric of an isolationist US policy or an aggressive foreign policy stance by one of the candidates can still have an impact in this fragile balance. The race could also provoke street protests in a way the US has not seen for decades. In any case, the uncertainty provoked by the campaign might lead businesses to put decisions on hold over the next few months, which could affect US economic growth. Another aspect of the campaign might be again on global geopolitics. Already Mr. Trump’s comments are sending shock waves in Japan as they could have a major impact on the US-Japanese post-war arrangements at a time of rising Chinese influence in the South China sea and North Korean “angst” to be considered as an “adult” on world stage. Another important point to note - whomever ends up in power in the USA - is most likely the American skepticism of the ability of Europe to “manage” its migrant crisis. The European division stemming from a weak set of operating tools, a forceful Russia and the lack of appetite for badly needed structural reforms to support the economy, combine to possibly shift the strength of an old alliance.
Conclusion What does this all mean to the markets? The recent dovish Fed talks will probably continue to provide some short-term support to the markets. The convergence over the next few months on the “long road to November” of important milestones with the strong probability of a volatility trigger could surprise the markets, however. Beyond the issues mentioned in this report, keys to extracting the markets from their sluggish environment and providing support on a medium-term basis are 4-fold: first, the need for structural reforms to support growth in Europe to lower the risk of a policy mistake by the ECB; second, for the China-USA pair to provide economic growth stability; third, for Europe to tackle to migrant crisis debate ahead of the “refugees sailing” season in the summer; and fourth, for consumer confidence globally to remain at least stable. Within this environment investors must continue to focus on quality long-term investments with relative growth potential, appropriate asset allocation, diversification and portfolio protection. Sudden bouts of volatility will be translated in currency moves and the weakening of well known correlations between asset classes. The pursuit of very unconventional monetary policies in Europe and Japan all point to choppy markets.
SOURCES * United Nations: International Migration Report 2015
** International Crisis Group, Exploiting Disorder: Al Qaeda and the Islamic State. March 2016.
ABOUT THE AUTHORS
Simon Kelley Independent Contributor
Simon is a global consumer equity specialist. He started covering the sector as an analyst at JP Morgan. In 2004 he switched to the buy-side, firstly at Pictet Asset Management as a global consumer Sector head before becoming a hedge fund portfolio manager at Citadel, Millennium and Citi Principal Strategies. Most recently he was Global Consumer Portfolio Manager at PIMCO. Simon holds an undergraduate law degree, two post-graduate law degrees and an MBA from the University of Oxford. Simon is a qualified Barrister, (1994 call).
Virginie Maisonneuve Managing Director
Virginie is founder and Managing Director of Maisonneuve Global Advisors. Virginie’s background in asset management spans over 28 years and she served most recently as CIO-Equities, MD at PIMCO (London). Prior to this she worked as Head of global equities at Schroders (London), Co-CIO at Clay Finlay (New York) and held various senior portfolio management positions at State Street Research (San Francisco), Batterymarch (Boston) and Martin Currie (Scotland). She started her career as a consultant for the French Ministry of Foreign Affairs in Beijing (China).
Virginie has an MBA from ESLSCA (France) and a BA from Dauphine University (Mandarin Chinese). She also has a first degree diploma in Political Economy from People's University (Beijing, China) and is a CFA Charterholder.
Lucrecia Tam Independent Contributor Lucrecia was most recently a vice president and global Sector Specialist/ portfolio manager at PIMCO in London, focusing on industrials for the global growth equity strategies. Prior to joining PIMCO, Ms. Tam worked for Schroders Investment Management in London as a Global Sector Specialist for Industrials Prior to that, she was an analyst at Allianz Global Investors Capital in San Diego and an equity research analyst at Deutsche Bank Securities in New York. Ms. Tam has a Master of Science in Management from Boston University and Bachelor Science in Computer Science from Roosevelt University in Chicago.
This information within this document has been provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order 2001. Should investment advice be required this should be obtained from a FCA authorized person.
Although we make reasonable efforts to validate the information provided, we make no representations, warranties or guarantees, whether express or implied, that the content in this document is accurate, complete or up-to-date.
We are the owner or the licensee of all intellectual property rights in the information provided in this document. Those works are protected by copyright laws and treaties around the world. All such right reserved.
You may print one copy and may use extracts from any page for your personal use and you may draw attention of others within your organisation to the information contained herein.
You must not modify the paper or digital copies of any materials you have printed off or downloaded in any way, and you must not use any illustrations, photographs or graphics separately from any accompanying text.
Our status (and that of any identified contributors) as the authors of the content in this document must always be acknowledged.
You must not use any part of the content provided herein for commercial purposes without obtaining a licence to do so from us or our licensors.
Maisonneuve Global Advisors Limited 1 Fore Street, 4th Floor London EC2Y 5EJ United Kingdom