Return of the Mac – A Global Macro Outlook for the Remainder of 2017

Written by Tom O'Cuinneagain

Global economic trends shape the world we live in. New economic trends such as rising economies and progress in innovation constantly emerge and shape our lives. As we proceed into the latter of 2017, the following seven trends will be the most important issues facing global equity markets that global investors should consider when investing in overseas markets.

1. Investing in the Trump Age

The surprise election of Donald Trump to the U.S. presidency will remain the most dominant feature of markets in 2017. So far U.S. stocks are hitting record highs and other global markets are rallying off their lows as investors have been buying stocks and selling bonds, believing that the pro-business Trump will usher in tax cuts, deregulation and fiscal stimulus rekindling economic growth and inflation in the world’s largest economy.

Headwinds will exist in 2017, not the least of which are the very elevated political expectations (this remains the biggest risk facing stocks) but also higher yields (which inhibit multiple expansion) and USD strength (which could weigh on corporate earnings/guidance). Expect a bit more market and stock volatility, assuming that President Trump is still using his Twitter account!

2. Global Growth Outlook Positive

Global growth, while a bit sluggish, is estimated to steady with real GDP growth of 2.5% in 2016 and 2.8% in 2017. Analysts expect advanced economy growth to be relatively stable (1.6% in 2016 and 1.8% in 2017) and Emerging Market (EM) growth to pick up (3.7% in 2016 and 4.3% in 2017), as recessions in some major EMs are fading. For global investors the message is clear- consider a selective overweight in EM equities going into 2017.

3. The EU Will Continue To Struggle

The EU continues to face a number of real and perceived headwinds both financial and political. Despite domestically-oriented data, especially those tracking consumer spending, still point to a recovery, industry and trade-related signposts show sharp declines. Purchasing manager surveys are plumbing the lows of two years ago. Economists see just 0.3% Q/Q GDP growth in Q3 (same as in Q2), and see risks of an economic slowdown ahead. This is all against a background of an ongoing and aggressive Q.E. campaign with the ECB intending to purchase €80bn of assets per month until the end of March 2017 or beyond.

Brexit will remain an issue for the EU although the direct economic impact may be less than expected due to the protracted nature of the split. Elections in France and Germany will have to deal with a resurgence in isolationist anti-immigration right wing political parties. Not surprisingly European equity markets are down YTD.

4. Chinese Economy Looks For A Boost

The direction of the Chinese economy will continue to be a focal point as we continue through 2017. Recent economic statistics show China’s economy picked up a bit of steam in August, boosted by government infrastructure spending and property sales that are helping to stabilise growth. China has also vowed to cut red tape and ease rules for foreign investors in a bid to boost the economy and counter a decline in private investment. Foreign direct investment in China during the first eight months of 2016 increased 4.5% year-over-year to $85.9 billion well below the double-digit levels seen in the past.

5. Brexit Will Remain Centre Stage

Brexit will also remain a defining feature for the U.K., its markets and economy. The pound is now down over 16% since the decision to leave the EU. Surprisingly, there are few tangible signs of economic distress in Britain: employment is steady, the stock market has held up in local currency terms, and government bonds are up in price. The U.K.’s largest companies, such as British American Tobacco PLC, GlaxoSmithKline PLC and Diageo make most of their income abroad. Their shares have surged with a weaker pound. Longer term however, it is possible that economic fallout from Britain leaving the world’s largest free-trade bloc will hit later, when Brexit actually occurs. Many economists are sceptical the pound can ever offset the trade impact of withdrawing from the EU.

6. Monetary Policy Inflection Point

Monetary policy in advanced economies may be at an inflection point. Since 2008, large-scale asset purchases have become the instrument of choice for many central banks to implement monetary policy (easing). These policies often referred to as ‘QE’ or “quantitative easing” –  fixed pre-determined quantities of asset purchases and increases in the monetary base have failed to ignite growth or inflation. In response, central banks are likely to pursue a variety of approaches, including yield targeting, more negative rate policies, and changes to central bank targets. What is needed, argue many economists is expansionary fiscal policies.

7. Chinese Housing Market Heads For Bubble Territory

Investors also need to consider the state of China’s booming property market. Spurred on by easy credit, a home-buying frenzy is sweeping through China’s major cities and spreading to smaller ones. It is stoking fears of a debt-fuelled investment bubble as household debt soars to unprecedented levels. Beijing seems wary of abruptly halting credit-fuelled housing market as home sales have buoyed a slowing economy as other growth engines like manufacturing and business investment remain sluggish. Property and related sectors, like construction and building materials, account for almost 25% of China’s GDP. Due to these uncertainties, Chinese equities have not participated in the recent global equity rally and remain down sharply YTD.

Tom O'Cuinneagain
Consultant - Paragon Alpha
T: 01 874 6770

PARAGONalpha is a Paragon Executive Intelligence company.