Last December’s Fed hike uncovered vulnerabilities in US credit markets and China. But outside of the energy sector, corporate debt ratios are low and with oil back up at around $50 a barrel, helped recently by long-awaited OPEC production cuts, the credit markets have de-coupled from the Fed and dollar. So too has China, due to the de-pegging of its currency from the dollar. An active Fed and a strong dollar are not the problem they were this time last year. This is evident in the only modest tightening in overall financial conditions that has accompanied this December’s Fed hike compared to last December’s, as captured by the Goldman Sachs US financial conditions index, for example.
We view the incoming administration as a coalition between Trump and the Republican party and see two areas of agreement: tax reform, cuts and de-regulation. Both will happen to some degree and both will be pro-growth. A key economic impact already underway, however, it is on Japan’s economy, where rising yields around the world have acted to deliver a much-needed depreciation of the yen, given the BOJ’s policy to peg 10-year yields on Japanese government bonds at about zero. We believe that there is a lot to like about Japanese equities given domestic policy support and corporate reforms. Global macro, which spoilt the picture earlier in the year, has now turned supportive.
Political risks loom on the horizon in Italy, France and Holland, and worries over the future of the European Union are likely to result in volatility next year. That said, in our view globally the opportunities for returns outweigh the risks. For now, we believe you should be in the market.
