Investment Insights: April 2017

As the first quarter of calendar 2017 comes to an end, the implications of two of the biggest “black swan” events of 2016 continue to develop, as does the response in investment markets.

2017-04-13

Hello and welcome to the next edition of Investment Insights.

In this edition of Investment Insights, we look at the ongoing dramas in Europe in which a number of major Eurozone countries are due to hold elections this year.

2016 Black Swans - Brexit and Trump?

On March 29, Theresa May triggered Article 50 of the Treaty of Lisbon which gives EU members the right to quit unilaterally, and outlines the procedure for doing so. This action sets in motion two years of potentially terse negotiations as Britain extracts itself from the world largest common market place, of which it had been a member for the past four decades.

One side effect of being part of a single trading bloc for longer than some careers, is that the UK finds itself in the position of having to import expertise in negotiating trade deals. If Britain does leave the EU without a trade deal or a transition to one, its exporters are likely to be exposed to World Trade Organization tariffs after years of duty free trade.

Looking outside of Europe, the Pound has fallen 16% since the June 2016 referendum, which has given UK companies a boost in international competitiveness, and there is no shortage of nations eager to sign up for a free trade agreement with the world’s fifth largest economy – Australia included. 

Later this month, 29 April 2017, will mark the 100th day of Donald Trump’s Presidency. We touched on the market’s reaction to Donald Trump elevation from reality TV star to President of The United States of America in our last edition of Investment Insights. 

Initial market euphoria has dissipated in recent weeks as doubts over President Trumps ability to successfully implement his ambitious tax and deregulation program has grown in the wake of his twice failed Immigration Ban and failure to “repeal and replace” the Affordable Health Care Act.

As the Democrats appear to be adopting some of the Tea Parties obstructionist tactics from the eight years prior, we see potential for self-inflicted volatility in the US Markets later this year as parties seek leverage in negotiations to raise the Government’s borrowing limit. The current limit is on track to be to be breached as early as October. During a 2011 standoff in which the limit wasn’t raised until the last minute caused Standard & Poor's to downgrade the America’s AAA credit rating for the first time.

2017 European Elections – Uncertainty is certain

Embolden by the “success” of Brexit, a number of candidates are campaigning on their own Eurosceptic platforms such as Marie Le Pen (France) and the Five State Movement (Italy). The surge of populist and nationalist parties is leading to renewed speculation about a Eurozone breakup, though it remains to be seen if parties are able to convert media coverage and rhetoric into polling success.

2016 has shown us (twice), the unthinkable can indeed happen at the ballot box and as such, the following elections are bound to influence the news cycle and investment markets over the remainder of the year:

Netherlands:
In the lead up to the March ballot, Geert Wilders, the anti-Islam leader of the Dutch far-right Party for Freedom (PVV) had been riding high on a wave of populism and looked on course to win. Wilders has vowed to take the Netherlands out of the EU as well stopping public money going towards development aid, windmills, the arts and innovation.  What actually eventuated was a collapse in support for the PVV, falling back to 2012 levels with the incumbent Prime Minister returned to power.

France:
Marie Le Pen of the National Font, has promised to hold a Brexit style referendum and reinstate the Franc for domestic purposes. Le Pen is expected to poll well in the first round of ballots in late April but is not expected to be able to overcome her rivals in the second round ballots in June.

Germany:
With elections due in September there is a chance that Angela Merkel – the current longest serving European leader - may be defeated by the centre-left Social Democratic Party. The market risk of this is low as German support for the Eurozone remains high and bipartisan.

Italy:
Seen as the highest risk election, there is possibility of Italian elections being held as early as September. As noted earlier, the Five State Movement (5SM) are advocating an Italian exit of the Eurozone. While 5SM not expected to win outright, there is a chance of being able form a coalition government. Given Italy’s support for the Eurozone is weak at just over 50%, this could cause panic leading to an increase in Italian bond yields.

Looking forward

With a number of major European elections scheduled that may keep fears or a Eurozone breakup alive, there is potential for further bouts of short-term market volatility. Prolonged volatility may add to pressure on the European Central Bank to extend its quantitative easing program, maintaining downward pressure of the Euro.

Having expended significant political capital with little to show for it in terms of legislative success, it remains to be seen if the cuts to corporate taxes and regulation and broad infrastructure programs promised by President Trump in his campaign come to fruition. Having priced these reforms in, to an extent, there is a risk of a pullback in US markets should progress become less likely.

The timing and magnitude of impact that each of these events may have on markets are uncertain at best. The speed at which markets price in new information has never been quicker, the risk of missing out on a sharp move higher can be costly to your portfolio’s long-term returns. This is why we at ShineWing Australia advocate strongly for taking a disciplined approach to portfolio construction, reducing the risk of any one event derailing your long-term strategy by diversifying across countries and sectors.

If you would like to discuss any aspect of your strategy and investments, or you would like help putting one together, please contact one of our advisors today.

Daniel Minihan
Partner, Private Clients and Wealth

Matthew Oakey
Partner, Private Clients

David Foord
Senior Manager, Wealth Management

Matthew Baum
Private Client Advisor, Wealth Management

Keegan O'Rourke
Private Client Advisor, Wealth Management

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