‘16 going on ‘17


James Holt

Director, Investor Solutions
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Every year has its surprises, but 2016 was a year in which politics seemed to drive markets and portfolios more than we’re used to – trumping (if we can use that term) traditional economic news, confounding pundits and roiling markets.

“I am just going outside”* 

Britain’s vote to leave the EU (Brexit) came as the first major shock. The market turmoil it created was largely a result of too much complacency on the way into what always had the potential to be a market-moving event. However the turmoil was as short-lived as the vote was unexpected. The difficulty here remains the future relationship of the UK with Europe; the longer the wait the greater impact it may have on business investment. Perhaps more importantly, Britain’s farewell note has focused attention on other European nations who – if their people were asked – might be just as keen to head to the exits.

Trump Triumphant 

The second big shock was the US election; unexpected, discounted and met with initial disbelief, yet going into Christmas the markets are now focused almost entirely on the positive effects that Mr Trump’s tax cuts, stimulus and deregulation may bring.

In some respects President-elect Trump is Ronald Reagan redux (perhaps without the old actor’s easy charm). He has similar policies on tax, regulation and defence spending, although the big spending infrastructure stimulus and trade protectionism are sharp departures from Republican orthodoxy.

One of the interesting things to watch over the next four years is how much leeway the budget hawks in the Republican party will give to Mr Trump’s stimulatory ambitions. Already, the bond market has been picking up on the potential for higher inflation and interest rates with yields rising sharply. This is something of a conundrum – with company valuations already elevated – equity prices and bond yields both cannot keep rising. One market will eventually blink. 

Going on ‘17

If 2016 has been a year when politics has driven markets, 2017 is unlikely to be any different. There are a slew of political break-points with the potential to buffet markets. Elections in the Netherlands, France and Germany may feature surging support for right wing parties. Italy may hold an early poll after December’s decisive referendum rejection of Upper House reform.

This is no guarantee establishment parties will be toppled but if France and Italy wind up being governed by parties hostile to the Euro we could be in for a very bumpy ride. 

Another X factor for next year may be Donald Trump’s highly unconventional governing style. Watching his Twitter account may be just as important as watching key economic data releases. 

From politics to fundamentals?

In 2016, ballot box surprises defined the year. Yet it also marked a sharp departure from the economic orthodoxies that have driven markets since the GFC. Since 2009 we have relied on central banks to grow the economy – after all they saved the world from a second great depression in 2007-9.

However it is now clear that the super easy monetary policies central banks pursued were better at creating asset bubbles than growth and jobs. Those that owned appreciating assets were fine, but those that missed out became increasingly discontented. That discontent boiled over at the ballot box in 2016.

Where global markets go from here is uncertain, however, one thing may become increasingly apparent; the long stretch of super-easy monetary policies that fuelled the outperformance in growth stocks (depicted below) is drawing to a close.

At Perpetual – always a value investor – we think this is good news. As the chart below shows (comparing the relative performance of Value versus Growth stocks in the US) – only in the aftermath of the dotcom bubble in 2000 have we seen as good a backdrop for value investing. Value investing hasn’t been rewarded as strongly in recent years as growth, but there is always value to be found somewhere in the market and Perpetual’s focus on buying companies with solid balance sheets and good management at reasonable valuations should help investors navigate 2017 with lower than market risk no matter what the New Year brings.

  Source: FactSet

* Lawrence Oates’ final words as he stepped out into the snow on Captain Scott’s ill-fated attempt to reach the South Pole.


This information has been prepared by Perpetual Investment Management Limited ABN 18 000 866 535, AFSL 234426 (PIML) for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.