This year has been a momentous one. The stockmarket’s reaction to Brexit and the election of Donald Trump as president of the US momentarily wrong-footed many investors. In both instances, a knee-jerk downward spiral and flight to safe haven assets was followed by virtual euphoria in some areas and corresponding sharp rallies.
In literary circles (not at all related you might think) the choice of singer-songwriter Bob Dylan for the Nobel Prize for literature was no more obvious. But reacquainting myself with some of his old songs, penned several decades ago, his lyrics are as apposite today as they were back then. His 1964 album The Times They are a-Changin’ could not ring more true.
We have witnessed a rise in political populism, a distrust of globalisation, an utter disdain for establishments and ruling elites who claimed to be self-styled experts and know better than anyone else how to “fix” the economy…need I go on?
So, just how will this shift from the elitist central bankers to vox populi – ordinary working people who have seen real wages eroded since the onset of the financial crisis and their roles displaced by the relentless march of technology – pan out?
President-elect Trump’s promotion of pro-growth policies, with the promise of a $1trn fiscal injection over five years, is designed to restore the ailing fortunes of America’s coal, steel and manufacturing industries. It will also go some way towards ending a decade of financial manipulation, negative interest rates, deflation, austerity and, more especially, the rule of central bankers.
As Dylan puts it in his 1968 hit Nothing Was Delivered: “Now you must provide some answers, and the sooner you can come up with them, the sooner you can leave.”
A tad harsh perhaps, but the role of central bankers as key decision-makers acting completely independently of democratically-elected governments is now open to question.
The effect on stockmarkets is manifold. The rise in inflationary expectations, which has resulted at long last in an upward-sloping yield curve, is good news in so many ways. For the financial community it restores banking profitability, the life-blood of economic activity. For the business community it means entrepreneurs can start to invest with greater confidence, knowing what their genuine cost of capital is likely to be. For the saving community, at long last, a better return on hard-earned savings.
And as for those companies with burgeoning pension fund deficits, finally their growing liabilities, which have ballooned on paper courtesy of negative interest rates, will be reduced.
The conclusion of all the above is that banks (still under-owned and trading at book value or less here in the UK), producers of commodities such as iron ore and copper, and most stocks with a degree of cyclicality attached to them should be the clear winners for 2017.
But let’s not get too carried away. Stockmarkets, especially in the US and to a lesser extent the UK, have already marked the prices of these stocks higher. Bond yields of 30-year maturities have already risen from around 1 per cent to over 3 per cent.
And where does that leave the outlook for bond proxies – companies sitting in the tobacco, consumer staples and to a lesser extent telecommunications sectors? Companies that, because of their sustainability of earnings in a low growth environment, meant investors were prepared to pay practically any price just to own them in their portfolios. The trade out of cyclicals and into these bond proxies has taken years to build. It could take years to unwind.
As I write, many headlines have been devoted to Trump’s “three Ts”: his tweets, the discussions surrounding his transition team and his unfortunate transgressions. Prime Minister Theresa May and Chancellor Philip Hammond may be glad that, for once, the spotlight is not entirely on them.
The UK Government would love to follow the US path and write a huge cheque to rebuild our pot-holed roads, speed up the process of Heathrow’s third runway and turn on the power in the Northern Powerhouse. But the ratio of debt to GDP, set to peak at 90 per cent for 2017-2018, cannot be eroded with the wave of a magic wand.
That job will be left to the currency and bond markets. Even though the pound has rallied from post-Brexit lows of $1.18, it will still have to take the strain. Economic growth for the UK will continue to be sluggish. Uncertainty over the triggering of Article 50, a slowing down in employment and the onset of inflation will eat further into wages, sapping consumer confidence. But as the Chancellor so confidently pointed out in his Autumn Statement, UK growth for 2017 is still forecast to be higher than that of Germany and many of our other European neighbours.
The road ahead is still bumpy: next year sees French elections, with support already gathering for Marine Le Pen’s National Front party and, come the autumn, an attempt by ruling German chancellor Angela Merkel to secure a fourth term in office. China’s role on the world stage and the extent to which the mercantilist policies of the US will speed up China’s efforts to focus on domestic demand remain to be seen.
And finally, what will happen to the role of central bankers? Yes, followers of Bob Dylan have already guessed it. The answer, my friend, is blowin’ in the wind.
Richard Buxton is chief executive at Old Mutual Global Investors