First Quarter 2017

Financial markets around the world are currently being pulled in opposing directions.

The rise of political nationalism in the developed world continues to weigh in on global equity and fixed income markets. While markets may have digested Brexit and the election of President Trump, there is increasing concern regarding upcoming elections in Germany, France and Italy. At stake is the effect of populist sentiments on global trade. It is freer trade amongst nations that has created economic efficiencies while lifting hundreds of millions out of poverty. Reversing this trend would be negative, both economically and socially.

In stark contrast to these political scenarios is a very good global macro-economic story. For the first time since the financial crash and great recession of 2008 – 2009, the global economy is now experiencing synchronous growth. It has taken nearly a decade for the world to recover, but positive growth rates are now being reported everywhere. For the past number of years, North America had experienced slow but steady GDP growth while growth rates in China slowed. Meanwhile, Europe and the emerging economies were left behind. This is no longer the case.

The American economy, chugging along at over 2.0% annual growth, is experiencing almost full employment and is robust enough to implement a measured return to “normal” interest rates. Once a concern, China asserts that it can sustain growth of 6.5% per annum. The threat of deflation has disappeared. The other Asian economies are picking up steam. Japan, which had been stagnant for years, is now experiencing a resurgence of capital spending. South Korea and Taiwan have seen a big increase in exports during the first quarter. While the UK had been doing quite well in recent years (the Brexit vote notwithstanding), the western European nations are now joining the party. Amongst the emerging economies, Russia and Brazil are the most important. Both seem to have hit bottom economically, and may well demonstrate a little bit of growth in 2017.

Virtually all of the companies that we invest in, be they large or intermediate in size, operate internationally. Without it, they would have a difficult time growing revenues and earnings on a sustainable basis. For the past three decades, technology and an increasingly better educated and mobile work force has made the world a more prosperous and safer place. Free trade, global economic growth, and political stability all go hand in hand. Financial markets should continue to reflect this increasingly ‘good news’ economic story, and reward companies that are operating best in this ecosystem.

The current threat to this otherwise positive outlook is a political one. Perhaps the “checks and balances” of the US political system will keep Mr. Trump in check (as it has so far) and the British can eventually find their way to a renewed trading relationship with their European counterparts. Having waited for almost a decade to return to global economic growth, it would be a shame to see this good news scenario threatened by bad politics.


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