Volatility and the Trump Effect: Navigating Australian and Asian Investment markets in 2017
Market volatility will remain a key theme in the coming year, against a backdrop of modest improvement in global growth, rising inflation expectations and uncertainty about the impact of policies flagged by the incoming US administration. On balance, we think the new US president’s trade policy may not be as negative for Asia (and Australia) as first feared.
AT A GLANCE: HOW WE SEE THE YEAR AHEAD
- Lacklustre growth, populism, fiscal stimulus and a rise in inflation are our key macro themes for 2017
- The policies of incoming US president Donald Trump in some respects support our outlook—for example, the likelihood of fiscal stimulus in the form of increased spending on US infrastructure and tax cuts
- A shift by the US to a more protectionist stance on trade would hurt emerging markets, although Asia might be less severely affected than is widely expected
- We see the prospect of significant disorder in the Australian housing sector in the second half of 2017 which could force the Reserve Bank of Australia to lower the cash rate
Asian Fixed Income
- A scaling back of US trade with Asia would leave more room for companies from China, India and Japan to pursue their ambitions in the region
- Asia remains attractive from a fundamental perspective, accounting for 65% of global growth in 2016. The region’s currencies and government bonds are relatively attractively valued
- We expect Asia to become a diversification opportunity for investors with high exposure to the US, especially if the new administration’s policies meet headwinds
- China, despite its challenges, is likely to serve as a force for stability in regional and global capital markets
- The sell-off in Asian markets after Trump’s victory has not changed our 2017 outlook for the region
- Trump’s main short-term impact on the region is likely to be through his policies’ contribution to reflation and rising interest rates
- The effect of US trade protectionism on Asia may be limited. For example, the main industries of concern to the US—steel and autos—account for a relatively small portion of Asia’s exports
- While China’s assertiveness in the South China Sea is a delicate geopolitical issue, it could be a positive for investment based on the amount of infrastructure and construction required
- The Australian equities market will experience more volatility as its two biggest sectors, resources and financials, feel the effect of global macro factors
- Resources will be affected by uncertainty about the strength of demand for commodities from China as well as by the possibility that the new US president will take a hard line on US-China trade
- Anxiety about the strength of the European financial system is likely to resurface, with a knock-on effect on Australian bank shares
- Despite likely volatility, we continue to regard the Australian equities market as relatively attractive given its dividend yields and opportunities to find value and invest defensively
From an economic perspective, four themes shape our view of the year ahead.
- The global economy continues to deal with a substantial amount of debt, which remains a headwind to growth. Our forecast for global GDP growth next year is 2.8%, compared to an estimated 2.6% for 2016.
- The political populism which to some extent has been a reaction to lacklustre growth, and which caused the two biggest political upsets of 2016 (the UK referendum vote to leave the European Union, and Donald Trump’s victory in the US presidential election), may continue and even intensify, causing further changes to the world political landscape.
- More countries are likely to follow Japan’s lead and begin using fiscal stimulus (for example, spending on infrastructure) in an attempt to reflate their economies. This reflects a growing view that unconventional monetary policies such as quantitative easing, used by many developed countries since the Global Financial Crisis to support growth and steady financial markets, may have achieved all they can.
- Slightly higher growth and some fiscal stimulus— together with base effects and a stronger oil price—add to the likelihood that global inflation has bottomed and is about to rise. The prospect of higher inflation and the expectation of further, though prudent and measured, interest-rate rises by the US Federal Reserve virtually ensure further volatility in global bond markets next year.
While Donald Trump’s unexpected victory and unconventional policy platform create uncertainties, they also in some respects support our outlook. Coupled with the Republican clean sweep in Congress, Trump’s victory has increased the probability of substantial fiscal stimulus (infrastructure spend plus tax cuts) and further tilts the balance to higher inflation. A Trump presidency will also help underpin the trend towards populism.
One of the main uncertainties that Trump’s victory has created relates to our outlook for emerging markets, which are likely to be adversely affected in the event that Trump delivers on his promise to take a more protectionist stance on trade. That said, emerging-market economies are in a stronger position today than they were during the “taper tantrum” of 2013.
Apart from our view on emerging markets, our global outlook has changed little as a result of the outcome of the US election.
Our Australia outlook is also little changed. Our core theme for some time has been the tug-of-war between the drag from the commodity sector and the boost from housing. To date, that contest has been even and the economy has done little more than “muddle through”. But the pace of growth in housing construction and prices is unsustainable, in our view, and its support for the economy is beginning to fade.
At the same time, while commodity prices have improved recently, we doubt the improvement is enough to help reboot the overall economy. Housing remains a risk, and we see the prospect of some disorder in the sector in the second half of 2017 that could well force the Reserve Bank of Australia to lower the cash rate, which is already at the historically low level of 1.5%.
Source: Alliance Bernstein: ASIA AND AUSTRALIA YEAR-END INVESTMENT OUTLOOK – 20 Dec 2016