How Windy Is It . . .? Monday, 20th March 2017 – No.221
Last week was a whirlwind week of economic and political announcements which provided the welcomed catalysts to propel stock markets to achieve new record highs. We started the week by witnessing the Dutch voters, turn out in force, to support pro-European parties which aided their centre-right Prime Minister, Mark Rutte, achieve a resounding victory and more importantly to fend off an election challenge by the anti-Islamic Freedom Party of Geert Wilders. We have highlighted previously the significance of the Dutch election for the Eurozone. Its significance runs a lot deeper, having been billed as a litmus test for populism within Europe, following last year’s Brexit vote to leave the EU, and the US election win by President Trump, which increased the uncertainty for stock markets. Following the Dutch result, which hopefully provides some solace for other EU governments faced with potential nationalism, Rutte now has the first opportunity to form a government, although with no obvious majority, and coalition talks potentially taking months, we view this much more as binary event, with the important message having already been delivered that a line in the sand has been drawn over the spread of populism which we view as supportive for risk markets within Europe.
Investors focus should now return home temporarily as Theresa May looks set to enact Article 50 on Wednesday 29 March, which sets in motion our departure from the EU before the key elections take centre stage in France in April and May, then Germany in September, which again should place the EU firmly back in the international spotlight.
The second major catalyst worth highlighting came from across The Pond, as the US Federal Reserve (Fed) increased its borrowing rate for the second time in three months, taking the base rate from 0.75% to 1%. This was much less of a surprise, for investors, that policy makers delivered on a rate increase following the Fed’s well-executed communications campaign in advance of the meeting. Of much more significance, to us, was the lack of change to their economic and financial projections which provided the necessary guidance that it may not tighten monetary policy as aggressively as financial markets were indicatively pricing in.
In the UK, the Bank of England’s Monetary Policy Committee left its policy unchanged, holding its borrowing rate at 0.25%, albeit its outgoing policy maker, Kirsten Forbes, unexpectedly voted to raise interest rates which is the first interest rate split the committee has seen since July 2016. Forbes believes raising rates would lessen the risk of above-target inflation, and boost an improved outlook for unemployment and UK output.
As we have expressed previously, we continue to expect uncertainty to unfold within Europe and the US, and indeed Globally as the World come to terms with the new leadership and geopolitical risks. Despite us having no clear idea as to a whole swathe of issues on the horizon, what we can be sure of is that once this uncertainty starts to dissipate that investors will return to focusing more on the fundamentals which is where our primary focus remains. Whilst it is pleasing to report that markets have achieved record highs, we remain firmly of the view that equity markets are certainly not overvalued, which is even more apparent from an overseas investor’s perspective, where the currency devaluation, following the Brexit vote, continues to provide a supportive backdrop for further corporate activity which remains prevalent.