Abu Dhabi 17 January 2017
Donald Trump’s announced reflationary measures, corporate tax cuts and other economic policies have been viewed positively in the market. Overall we expect the Trump administration to be inventive and make fewer mistakes than many skeptics are expecting.”
The following quote in many ways sets the tone: “Business people like Mr. Trump understand you can grow yourself out of excessive debt” (Anthony Scaramucci, senior Trump advisor).
Expect fiscal policy to gradually come to the aid of monetary policy – the return of pure Keynesianism. Republicans in charge of Congress is the real win – and the Party can begin to heal, even under Donald Trump. Being able to get fiscal policy changes through Congress is very significant, and the fiscal conservatives are likely to be out-voted.
The Fed’s projections for the federal funds rate at 1.4% for end-2017, 2.1% for end-2018, and 2.9% at the end-2019 look reasonable. We expect the federal funds rate to be in the target range of 1.25-1.50% at year-end 2017. Yellen said a few weeks ago: “…the evolution of the economy warrants only gradual increases in Fed funds rate.” US Federal Reserve rate ‘normalization’ can proceed if economic growth is reasonable - recent good consumer confidence data from the US is key to extending the economic cycle and we think this remains on track.
The current US business up-cycle is already 32 months longer than the average since the 1930s – but it should last another 18 months or so given the positive backdrop as well as the measures that Trump has outlined to reinvigorate the economy.
Brexit: concessions expected on both sides
Quantitative easing in the Eurozone and Japan will be gradually tapered. The ECB has already reduced the monthly amount of bond buying but over nine months rather than six. The ‘Brexit’ that was voted for in the UK is likely to see slow progress. Prime Minister Theresa May is continuing with the planning for Brexit, and the negotiations will be difficult for her and her team in 2017. We expect a ‘special deal’ may result in the end, similar to Norway and Switzerland, with concessions made on both sides. The various elections due to take place in Europe in 2017 will help dictate the future political direction of the European Union: these are discussed under the G4 FX section of this report.
Since 2013’s taper tantrum, the current account deficits of India and Indonesia have turned around. The emerging world is perceived to be less risky than before. China will continue to show good growth overall in 2017, similar to 2016. Growth in reality will likely be about 5%, rather than the officially-stated 6.5%. IMF global growth forecasts stand at 3.4% for 2017, vs. 3.1% for 2016; we expect estimates for 2017 and 2018 to be revised upwards. Geopolitical risk will likely abate in the Middle East.
Investment background: bullish move in markets
Trump wants to reduce corporate taxes from 35% to 15%, and spend $1 trillion to rebuild and improve the US’s crumbling infrastructure. His reflationary measures – which may take time to ramp-up – should generate helpful multiplier effects. This will be bullish for US EPS forecasts. We have already seen a bullish move in markets reflecting this. A rotation is underway out of safe-haven assets, into riskier assets such as equities and this should follow through into 2017.
Some have accused the US Federal Reserve of being behind the curve in rate hikes for the last several years. The unprecedented events of 2016 are behind, and we expect the Fed to now ‘normalize’ rates. The US dollar will continue to rise as a result, and the trajectory should be steady. US equities should as a consequence see steady inflows through the course of next year.
If the end of QE can coincide with higher levels of business confidence (we believe it will), QE withdrawal won’t matter very much. The incoming Trump Administration will not accept the Eurozone/Basel restrictions on banking supervision. US financial regulation changes don’t (unlike tax or trade), require legislation. Trump wants to ease the regulatory burden on financial institutions, enabling banks to lend more freely. There is much debate over issues such as the proposed repealing of the Dodd-Frank agreement.
This is all potentially very bullish for the US financial services industry. The Trump Administration will have little or nothing to do with collective agreements, in trade - or anything else; it will all be bilateral. US corporate investment will likely revive as companies will see more chance of it paying off.
NBAD’s Director of Investment strategy, Global Asset Management
Extracted from NBAD’s Global Investment Outlook 2017