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Looking into 2017 with Hermes The election of Trump, and the vote for Brexit shortly before that, clearly indicate that for a large number of citizens in the UK and the USA, the ‘system’ had failed them to such an extent that they were willing to take a leap into the unknown and opt for profound change. I would argue that the reason why the system failed so many is to do with the anaemic growth since the crash of 2008 and in the UK drive for austerity. This combined with profound and fundamental changes in productivity due to technology, which along with globalisation and cheap immigrant labour combined in a way that prevented a very large part of the population from feeling any economic benefit since 2008 and gave them a deep sense of being ignored and left behind by the elite. Looking forward into 2017, we can safely say that the result of both these events will likely increase political risk in developed countries. Specifically, the risk premia in Europe as we see how the Putin/Trump relationship develops and how it might affect Russia’s revanchist policy, as well as elections that will be fought in several European countries against a backdrop of the Brexit/Trump political upset. It may also create an increase of risk in the oil producing Middle East. From an economic perspective, it seems that Mr Trump, with the support of both houses, is set to increase spend on infrastructure in the US as well as try to boost consumer spend by reducing the Federal tax rate. This stimulative policy implies an increase in US government debt. However, this positive economic policy might be countered
somewhat by an avowed protectionist stance, sparking stagflation. The key question, though, is whether even with this capex and fiscal boost, the lot of ordinary blue collar workers and lower middle class families in the USA, can be much improved, if one accepts our premise of a permanent downshift in the natural rate of interest and a technology led change in productivity. I think the right thing to do for long term investors is to ignore the noise and concentrate on the long term. A permanent downshift in the natural rate of interest would direct one to invest more in equities than in bonds and more in emerging equities than developed equities (although US small cap would be a beneficiary of Trumponomics). However, the real worry is neither anaemic growth rates, nor possible inflation, nor even market volatility driven by hard to predict political risk. The real worry is that if Trump reneges on COP21, we as a species would be unable to prevent 2 degree warming, which is a long term negative for the generations to come. Saker Nusseibeh Chief Executive, Hermes Investment Management
INVESTMENT In a year of electoral shocks, everything is fine as long as nobody steals the punch bowl. But as time passes, there’s a growing sense that the punch may not be quite as tasty as everyone first thought, and its beneficial effects seem to be lessening with each mouthful. For ‘punch’ read the unconventional monetary policy gambit taken by the world’s central banks. In a world of low or zero interest rates, two central pillars of investment, namely valuation and asset allocation, become incredibly difficult. All risk assets benefit from the additional liquidity that is pumped into the system, and it is hard to distinguish them properly on fundamental grounds. Beyond that, low interest rates and low growth direct us to a future of incredibly low expected returns relative to the last 30 years, creating a challenging environment for any investor to reach their return target.
For professional investors only
Risk, at least in terms of headline volatility, is suppressed. This could lead investors to become complacent and allow more leverage to creep into the system – until the next shock, that is, when once again the markets will reveal themselves as fragile and liquidity risk will be at the fore (beware corporate bond ETFs). Fo