GlobalMar 13 2017

Stimulus hopes power markets, but for how long?

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Stimulus hopes power markets, but for how long?

The first three months of 2017 has been dominated by just one person, Donald Trump, and the effect his policies have had on both the geopolitical environment and markets.

For the latter, a recent Trump speech to Congress that was described by many as taking a more moderate approach, combined with plans to introduce a $1trn (£818bn) infrastructure spending plan, has helped boost prices. 

The Dow Jones Industrial Average closed above 21,000 points for the first time on March 1, while the S&P 500 index reached 2,396 and the FTSE 100 closed the day’s trading at a then record high of 7,383 points. Joshua Mahony, market analyst at IG, an online trading platform, notes European and US markets gained substantially in the wake of president Trump’s comments. 

 Europe’s performance seems to have defied logic Tim Edwards, S&P Dow Jones Indices

“US stocks surged to new highs yet again, as the promise of a $1trn infrastructure spending spree crushed any fears that we could see the Trump rally come under pressure. The winners from Mr Trump’s recent appearances are clear: deregulation of financial services, a 10 per cent rise in military spending, and $1trn towards infrastructure projects all provide big opportunities for US firms. The pharmaceutical gains seen after Hillary Clinton lost seem ill-founded, with Trump declaring he will bring down sky-high drug costs.”

What is more, Mr Mahony points out the FTSE has been helped in part by a weakening pound at the hands of a resurgent US dollar, while UK listed firms such as Ashtead and CRH both rallied as they stand to gain substantially from the approval of infrastructure spending. Of course, it is not all good news. The election of Mr Trump and the Brexit result were consequences of the growing move towards populist party politics, particularly in Europe where a number of countries including France go to the polls this year. 

Tim Edwards, senior director of index investment strategy at S&P Dow Jones Indices, notes that within European equities all but one measure of performance provided positive returns for investors in February, with momentum investors the ultimate winners. 

His research notes the UK was the greatest contributor to Europe’s performance in the month, although “every major economy contributed positive performance in Europe, apart from Norway, which was more or less flat”. 

But Mr Edwards warns: “Europe’s performance this month seems to have defied logic, providing returns across the board despite widespread political uncertainty. And while equity benchmarks have remained fairly untroubled, reading between the lines there are some signs of nervousness: defensive sectors, and defensive strategies, largely outperformed their peers. 

“With the first round of the French election, a Dutch general election and the official start to the UK’s Brexit negotiations looming, it will be intriguing to see whether the equity markets’ positive performance will continue, or if instead we’ll see a bit more volatility coming back into European equities.” 

In the UK, the House of Lords has already added one amendment to the Brexit Bill on the rights of EU citizens in the UK, and with more expected to follow, the passage of the Bill may not be straightforward. This suggests the end of March timeline for triggering Article 50 may be under threat. 

Meanwhile, eurozone CPI reached 2 per cent at the start of March, the first time since 2013 that it has reached this level, which could lead to less accommodative policy by the European Central Bank to keep inflation in check. But with the US Federal Reserve expected to raise rates this week thanks to a continued strong dollar, monetary and fiscal issues continue to play on investors’ minds. 

Neil Williams, group chief economist at Hermes Investment Management, suggests that while in the short term speculation that major economies will open the fiscal box is sparking reflation trades, markets are ignoring the fact they may need to “brace for political distrust, with the threat of beggar-thy-neighbour policies – from the US to anti-European populism – rising”. 

He explains: “In which case, markets face a year of two halves, where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, the trade-off is that policy rates stay lower than many expect.” 

Nyree Stewart is features editor of Investment Adviser