US
2017
began with Trump’s inaugural speech after he took over The Oval Office in
January. It was surreal and scary how serious he was about his radical foreign
policy. There were protests and demand for impeachment at the start of the
year. But like most things in life, it died down and our man continues to
reign. A bevy of changes to the tax code
at the individual, corporate and international level came into effect at the
start of 2018. Large companies are
getting a big cut to the corporate tax rates – down to 21% from 35%. This may
convert itself into heavy perks and financial benefits to employees. Better
consumer sentiment and more consumer spending? Making America great again?
FED
kept it slow and easy with a 75 basis points increase over 3 rate hikes as FOMC
continued to be wary of low inflation.
While the unemployment rate stayed low, wages remained at a decent level
and growth surprised on the upside, it maybe a year before aggressive hikes
happened. Change of Guard at the Federal Reserve may not mean change of
stance. But I would wait and watch.
Euro
Zone
surprised positively. Macron won the French election giving us hope that
the world is not moving to far right in a hurry; his pro-Euro and
pro-immigrant stance help heal deep wounds post Brexit and Trump’s
protectionism. Chancellor Angela Merkel won (albeit precariously) the 4th
term in German elections; however here, hard right AfD managed to enter
parliament.
ECB
continues its asset purchase, to a lesser extent though and said in
no uncertain terms that it would continue its accommodative stance for as long
as needed. This could mean all of 2018, though the economic indicators
including growth - are starting to look better.
UK
Brexit
is being the single source of pain for the sluggishness in the UK economy as it
stifles policy advances. The entire
nation is in a limbo as the policy makers are distracted with goings-on in
Brussels (which so far, is pretty much nil). Amidst this Brexit ennui, there
are still hopes that Brexit could be reversed in 2018. Realistically, what
looks likely is a soft Brexit that too in a last minute agreement (March 2019)
as EU continues to play hardball.
China
In Communist Party Congress's 5 yearly summit, Xi Jinping has
consolidated his control over the machinery of the Chinese government. The
Party congress approved the amendment of the official Communist Party
Constitution to include “Xi Jinping Thought of Socialism with Chinese
Characteristics in the New Era” which is his vision for China’s future. With
this, Xi joins revered party legend Mao Zedong to have their official thought
enshrined in the Party’s Constitution while still in office.
Global Equities
Global
growth, lax monetary policy across developed nations, new tax legislation, low
volatility (one important indicator is the CBOE volatility index, known as Wall
Street’s fear gauge - fell to a record low) coupled with investor’s complacency
(or is it irrational exuberance? We miss you Mr. Greenspan) have helped
equities soar across the globe. One research shows, of the 73 bourses tracked
globally all but nine have recorded gains, this year.
USD
Dollar
index has had a tough year with hopes of quicker rate hikes fading away. Also the
single currency’s strength with improved geopolitical and economic situation
and Pound’s recovery added to the woes of greenback. With US inflation likely
to be low, market’s expecting another 75 bps cut this year – this may not
be the best news for Dollar this year too. For the same reason and with benign interest rates across the globe, equities may have another profitable
year.
India
At
home, coming on the heels of demonetization, introduction of GST and botched up
implementation threw businesses off track. Strong polarizing views continue as
regards the current Government and it will only get more intense as we approach
election year. Rupee, however has been
gaining on the back of weak dollar. With the crude where it is, this should
help and there hasn’t been much of resistance from RBI in letting Rupee soar. The trend should continue, domestic political surprises not withstanding.
What
do we watch for going into 2018?
1. Geopolitical stress –
what with Trump and Kim Jong Un continuing their war of words which has currently
reached debating sizes of their nuclear buttons, Fastest finger? Scary!
2. Developments in Brexit
discussions – will it get anywhere?
3. General elections in
Italy
4. New FED chair Jerome
Powell’s tone
5. Bitcoin – this reached
dizzying heights both in terms of value and popularity in 2017. What next?
Collapse? Better liquidity and depth?
6. Flattening Yield Curve –
New normal or a warning sign for an economic slowdown?