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Rex Column                                                                                 6 March 2017

Hope not a strategy    6/3

by Cees Bruggemans          words 350

Hope is not a strategy, right? At least, that is the view of realists. But if so, what is powering US equities while bonds apparently remain stagnant, and the equity excitement spilling over worldwide (at least in places)?

It probably isn't all hope at all. Instead, three engines are being suggested, one of which is the upbeat underlying data, one is the many Trump promises, and one is (perhaps controversially) the Fed new found determination to raise rates.

 

How does that mix work?

For one, the underlying growth momentum in the US is looking up and couldn't possibly be a Trump phenomenon, as its origins stretch back much further in time. So the underlying strength has an Obama foundation, however confusing that must be for some.

Regarding promises for the immediate future, the Trump agenda comes into view, along with the likely Republican Congressional response, and the ultimate implementation. The main themes here are by now well established, namely tax cuts, deregulation and infrastructure spending as net stimulaters. Even if some of these get watered down by a recalcitrant Congress, what remains is still stuff to get the juices going, spread over some years.

Lastly, there is the confusing presence of the Fed. Normally, one would expect an acceleration in the rate tightening timetable by the Fed as a negative force. But if this is taken as confirming that the growth momentum is real, in a world where there remain many skeptics, it could actually reinforce the market belief in such growth and support the equity gains.

Beyond America, one notices that things are going somewhat better in Europe, too, at least in places, and that the growth performance of China continues, in turn supporting the global commodity revival after the deep dip early last year. This supports commodity producers, and all of it supportive for Emerging Markets.

All these processes aren't short-term phenomena. Instead, it could linger for some years. That in turn could support equity markets more for longer this decade than so far accepted or expected.

Enjoy the ride.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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Twitter  @ceesbruggemans

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