Short Note 26 April 2017
The confidence lever
by Cees Bruggemans words 570
We have had some recent examples of remarkable confidence boosting events, in each case concerning future promises by some newly elected politician.
There was the 18 month campaign slugfest by Donald Trump, that didn't really connect until dragged across the finish line. Thereafter, markets with a gusto came to discount the Trump factor, in his vision of tax cuts, higher infrastructure spending and deregulation making business “easier” in many sectors, all of it promising more growth.
It was good enough for the biggest rally in US equities since 1932, not a mean feat, while bonds and the Dollar rose.
As of this week something similar appears underway in Europe, with the main lever Emanuel Macron, the centre-right French presidential candidate. With polls having called the first round with great precision, people are assuming they will do so too for the second, crucial, round. With 38% predicted for Le Pen and 62% for Macron the error margin could be even bigger than usual and still deliver.
And markets have responded joyfully, with the Euro stronger, European equities higher and French bonds also pricing higher.
The European prospect looks a good deal more promising now that a Macron presidency has come into view, despite being by far the youngest and least experienced politician. These are apparently things to worry about tomorrow.
But just as markets can generate an initial enhusisastic confidence in response to the promises of a promising candidate, and the policies he/she may favour, just so the tide can start running out quickly, too.
The Trump enthusiasm survived Christmas, but then started to mark time, and fading rather strongly by the end of the first quarter and into the second. The composition of Congress turned out to be rather more complex than imagined (the Republican splits have been compared to the Democratic/ Republican divide, only worse…). Trump might have picked the wrong priorities to start with, rather than the ones the markets were focused on. And when Trump turned out to be less of a deliverer, so far, than fancifully in calculated, there was capitulation to disappointment.
Six months, a phenomenal run up and a serious slump. You don't see that every day. But then Trump as candidate always looked greater than life.
Is it the same about to be encountered in Europe? Macron sounds like a sound reformer, potentially breaking the French rigidity mould of decades. Except for one minor detail. He doesn't have a party, with no representation in the 550 seat parliament.
Elected president on 7 May, Macron would have to move heaven and earth to create a party, and find people to run for parliament. But with French politics as split as the first round of the presidential race last Sunday (four candidates polled near 20% each, the remaining smaller parties took the rest), it is unlikely that Macron will easily create a parliamentary majority. Not even when in alliance with Fillon.
How he therefore hopes to coach his policy reforms through a recalcitrant French parliament is anybody’s guess. Make ready for surprise, here, too. And markets fading by September, too, as in the US recently.
In SA, an ending of the Zuma era would likely bring an instant upwelling of great relief in markets. But how long would it take to re-examine the greater political context, and the likely continuation of too many bad old policy habits, rather than free the way for a new broom? An inverse replay of 1994-2000. We have seen something like it before, under totally different circumstances.
Bruggemans & Associates, Consulting Economists