White House could trump equity recovery

For investors in general, unless one is lucky enough to be a vulture fund picking up cheap assets in the ‘Great Irish Firesale’, the last few years have been incredibly difficult in many respects and incredibly easy in other respects.

Economics have been pretty horrendous, but equity markets have enjoyed a very impressive performance. For investors who were brave enough to come on board the equity train at an early stage, the returns have been tremendous. But for many, risk-aversion and the flight to risk-free assets offering abysmal returns has been the name of the game.

Over the past decade, the global economy has come through incredible turmoil and global policymakers have arguably faced the most immense economic and financial challenges since the 1930s.

A decade ago in 2007, most parts of the so-called developed world literally fell off a cliff as the US sub-prime debacle erupted and spread its tentacles across most jurisdictions. While the US and UK economies recovered relatively quickly, thanks to aggressive and decisive policy responses, it took a whole lot longer for eurozone policymakers to respond.

At many stages over the years of pain, particularly as Greece imploded, the whole future of the euro project as currently constituted was very much up in the air, but the will of ECB president Mario Draghi and of the eurozone political system kept the show on the road and ensured that we have come out the other end intact.

One of the legacies of the crisis has been political, as disaffection with corporate behaviour and fiscal austerity have combined to deliver considerable political turmoil, particularly the election of Donald Trump and the Brexit vote last year.

Despite all of these unprecedented issues and challenges, global equity markets have put in a storming performance since the first quarter of 2009.

The reality is that investors faced with zero or near zero interest rates and historically low bond yields had little choice other than to invest in equities if they wanted to make any sort of acceptable return.

Quantitative easing (QE) also created liquidity that found its way into equity markets; and of course, the corporate sector responded aggressively to the economic crash by cutting costs and thereby protecting margins and earnings.

On any metric, the bull run since 2009 has been very impressive. However, the market run has lasted for a prolonged period and having come so far, one has to have some concerns about the sustainability of current market highs.

The US is clearly of most concern in that regard. Since last November, the US market has made massive gains on the back of President Trump’s proposed policies on corporation tax rates, income tax, and infrastructure investment spending, but this could end in disappointment.

While the US economy is doing reasonably well and the labour market, in particular, is looking very strong, the politics are all wrong. The handling of the North Korean situation and the response to the Charlottesville riots by the President have not inspired confidence. In addition, the personnel situation in the White House is imploding and does not inspire any semblance of confidence.

The problem is given the vulnerability and policy mistakes of the administration, it is not clear that President Trump will have sufficient political strength and support to push through his economic agenda.

As mentioned earlier, these policies had proved very supportive of US equity markets since Mr Trump’s election, but the chances of them being implemented are dissipating fast. Hence, the risks look reasonably obvious as a consequence.

Fortune favours the brave who are prepared to take a long-term perspective on investment rather than being freaked out by short-term market movements.


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