Short Note 8 December 2016
Afraid of Nothing
American equity markets are clearly not afraid of Trump (bonds are different, rightly so). European equity markets seem not to be afraid of Brexit, Italian chaos and anything that France may offer, with populist right-wingers making head way everywhere (but not enough?), yet Merkel safely ensconced in Germany. And the Rand currency market also doesn't seem to be afraid of the ANC or the daily litany of litigation & public outcry.
That's a mouthful. But markets are bearing out various messages, yet pointing in similar directions. Across the world, don't be afraid. Instead, take a Kitkat.
Trump deregulating may be good for corporate earnings, along with a 15% US corporate tax rate, corporate savings salted away overseas to be repatriated (they are talking over $2 trill) and household tax cuts will get spend, alongside grandiose infrastructure stuff (even if only half sees light of day, but still $1 trill over ten years).
Also, the geopolitical noise may be welcomed. Stop nation building (and losing expensive wars). Cut a deal with Putin (and lower tension). Get Europe to grow up and take responsibility for itself (what's wrong with that?). And end the Chinese free ride.
Few saw it that way prior to 8 November. But remarkably many have boarded this train, and it is rolling.
In Europe, the handwringing is still about too many right-wingers everywhere, and the UK that collided slow-motion with a brick wall (bills due in the 2020s).
But it seems Italy has to sort itself out (which may come as a surprise). A bigger surprise is France where the socialists are hopelessly fractious, Le Pen may get blocked (think American football) and an unexpected hands-on conservative quarterback (Fillon) is about to take centre stage. If that sets the pace for Europe, she could finally turn into a bit of a comeback kid, also if Middle Eastern tensions could ease and refugee flows dry up.
That, too, wasn't the scenario a month ago. Remarkable, really, what November wrought.
Asia will not like all it hears here, in the crosshairs of Trump trade intervention, and China possibly not liking America’s normalisation (“hallo, Taiwan). But the rules of the game seem to be shifting, and a new era offering itself.
It must be an embarrassment for the ANC government to realise it isn't quite being taken serious any more. Or are they beyond that, too? Rating agencies rattle the cage, and their uniform downside outlook warns of downgrades ahead in 2017. The NEC met for three days and retained Zuma. And the Rand is trading at 13.50:$ and slowly whittling away its undervaluation (relative to 11-12:$).
You would think markets would have more respect for zero growth, stagnating SA employment, ratings downside warnings, massive local capital outflows as companies and households migrate their capital elsewhere and global managers were net sellers, the ANC insisting on loyally keeping its weakest hand and the Fed about to lift its likely rate trajectory through 2018.
One might have expected some of that to have become reflected in the Rand. Apparently not so. Or does it mean markets rate Zuma for what he is, looking beyond to the next generation of leadership that is likely to sweep out the stables on a fairly short time horizon (what's another year plus?)? While globally the message is encouraging rather than demoralizing.
Markets consume loads of information and misinformation. The times are changing, and the main bets placed early. One wonders how this is going down in Beijing and at its main disciple (Zuma’s Pretoria)? We bet on the wrong horse, did we? Shame, try again, please.
Bruggemans & Associates, Consulting Economists