The inauguration of Donald Trump as the 45th President of the USA has provided further impetus to increasing levels of protectionist and nationalist rhetoric around the world. True, Trump is more outspoken and confrontational than most, but he is part of a larger movement which leapt to prominence with the surprise UK Brexit vote. So, what does it all mean? What can we expect next? More importantly, how is this likely to affect us here at the bottom of Africa?
Anti-establishment sentiment This rise in populism is considered a consequence of two longer term trends, which have now reached boiling point. The first of these is a steady decline over the last 40 years in lifestyle standards of middle-class families in the developed world. Automated systems have replaced many white-collar jobs (think of all the clerical /legal /banking functions which are now performed by computers), and often jobs that do remain are lower paid. Many manufacturing jobs were outsourced to countries such as China and Mexico with lower labour costs. The result of these forces are that average salaries for most workers in the US and Europe have remained nearly static in real terms for over 40 years. Youth unemployment has skyrocketed throughout the developed world. This has put enormous pressure on lifestyles. Tertiary education, good healthcare, and home ownership, which underpin the modern middle-class ideal, are now out of reach for large numbers of younger people, whose parents did enjoy those benefits. There is no indication that this situation is likely to change. Populist movements feed off this frustration. To make matters worse, it is perfectly clear that the benefits have gone to the new elites – a small group at the top, who have enjoyed steadily rising incomes and rapid growth in assets over the same period. In his great work, Capital in the 21st Century, Thomas Piketty shows that the wealth gap between the richest people and the rest of the world is now greater than it was at the height of the European Empires in 1914. This divide is increasingly seen as unfair and unsustainable. Last week at Davos, this position was put quite starkly by Oxfam, who stated that the top 8 richest people in the world own more than the bottom 3,6 billion people! The wealth gap between the richest people and the rest is now greater than it was at the height of European Empires in 1914. The chart below shows that from the time of Reagan and Thatcher nearly all the growth in real income in the USA was confined to the top 10% of earners.
The second emerging trend is the opposition, particularly in the US and Europe to mass immigration. The irony is that the overwhelming majority of immigrants have a very positive effect on the countries they settle in and are essential to their continued economic growth. This is because they are generally hard-working and settle for many of the jobs that the wealthier locals no longer want to do. Menial workers in the UK are often from less developed Eastern European countries such as Poland, while in the US, Mexicans perform much of the hard labour. Immigrants are on average younger than the general populations that they settle in, so they can also have a very positive demographic effect on the countries they emigrate to. This is one of the compelling reasons why Germany, which has a rapidly ageing population, admitted 1 million Syrian refugees in 2015/6. The social and cultural differences between recent immigrants and local populations inevitably give rise to tensions and sometimes open conflict, as seen in Germany last year and in South Africa’s xenophobic flare ups. It is a well-worn pattern of history that in times of hardship the locals will end up blaming their problems on recent immigrants.
What is in store for 2017? Generations of politicians have found that protectionist policies and anti-immigration platforms enable them to gather rapid support in uncertain times. This is Trump’s strategy and it provided the impetus for his unexpected victory. A major theme to watch in 2017 is further growth of Euro-sceptic parties who share many of Trump’s protectionist and anti-immigration policies and seek to weaken ties with the European Union.
2017 is likely to see an increase in political and economic uncertainty.
The Italian Referendum in December resulted in the heavy defeat and subsequent resignation of the liberal Prime Minister Matteo Renzi, and a significant strengthening of right wing parties. France, the Netherlands, and Germany all have elections this year, and in each case, there is a realistic chance that the results will move these core members of the Eurozone away from the liberal values of the past few decades and towards more nationalistic, inward-looking policies. The massive globalisation of the world economy over the last few decades was driven by liberal economic policies which are now under threat. So, 2017 is likely to see an increase in political and economic uncertainty in the USA, the world’s largest economy and the European Union, the world’s largest trading bloc. Now that the UK has voted for Brexit, it must go through the messy process of disentangling itself from Brussels. This is likely to take at least 3 years, during which time the business environment in the UK will remain uncertain. The Pound has fallen sharply and the UK economy has lost momentum since Brexit, so low growth is the best that can be hoped for in the next year or two. In his first few days in office, Trump has made it clear that his administration’s stance is USA first. Long-standing trade agreements with neighbours Canada and Mexico are to be cancelled, and he has already abandoned the Trans-Pacific Partnership. These actions are designed to protect US jobs. His views that NATO will be re-negotiated does make sense, however it adds another layer of uncertainty to an already volatile Europe.
How will this affect my investments? Since the Global Financial Crisis of 2007 – 2008, many investments have performed well on the back of a mild world economic recovery and enormous monetary stimulus in the largest economies (quantitative easing). Interest rates have remained extremely low and even negative throughout the developed world in a move designed to encourage investors to look at riskier assets (such as equities), companies to expand and consumers to spend. This strategy has had mixed results and did not achieve more than anaemic economic growth throughout the world. It is now becoming clear that a return to more normal economic policies, including higher interest rates is desirable. This is called tightening economic policy because the costs of borrowing will be higher. The US Fed has already started to raise interest rates and has stated that it wants to continue to do this during 2017. This has the effect of strengthening the US Dollar and signalling to the stock markets that one of the longest bull runs in history may be near the end.
The broad dollar index below may reach all-time-highs of 130 this year.
Trump’s policies on the other hand are centred on fiscal stimulus – lowering taxes and increased government spending – in order to create the US jobs, he promised to his supporters. So, there is a looming potential conflict between Trump’s policies and the Fed. We have already seen the dismantling of trade agreements in the first days of this new Presidency. So, the threat of a trade war with China and other countries is possible. At the very least, we will see barriers to trade returning in many markets as they try to protect their own shares of the global trade pie. This is never good for global growth. As far as South Africa is concerned, smaller economies do not feature significantly in Trump’s world view and are unlikely to be touched directly by his policies. The political changes in the UK, the USA and those underway in Europe, create an environment of uncertainty. Business does not like uncertainty. This is a constraint on growth. The world’s major economies are slowing and the growth engine of the world for the last 30 years, China, is going through major restructuring of its own. Prospects for global growth in 2017 are consequently muted. South Africa though, has several areas that look positive. The firing of Finance Minister, Nene in December 2015 proved to be a watershed for business, civil society and even the ANC itself. Prior to this, the country was drifting steadily towards entrenched cronyism and endemic corruption. The shock of Nenegate galvanised business to become much more involved with government to provide economic stability and to work together to create solutions for all South Africans. A year later the joint government /business delegation to the World Economic Forum in Davos is reported to have a strong working relationship and to have presented a very favourable impression of South Africa to the world.
Our free press and civil society, often aided by social media, have relentlessly exposed the layers of corruption in many areas of government, parastatals, and business. In an open society with an independent judiciary, corruption tends to get uncovered and the perpetrators punished. This is a worldwide trend. Over the next few years we can expect to have more accountable and efficient public institutions and parastatals and this will stimulate growth in our economy. The volatility seen on global markets in 2016 is likely to be repeated in 2017. The bull run in US equities in now the second longest in history and so may be ending. George Soros, the legendary investor believes Trump is a con-man and that his policies will trigger a stock market slump this year. On the other hand, Nobel prize winning economist, Robert Shiller believes that Wall Street may rise to the giddy heights of the Dot Com boom before crashing again. South African markets are likely to be less volatile because we have high-interest rates, a steady inflation outlook, and the JSE is still well below the peak of 2014 while company earnings have grown. However, our markets and currency are still vulnerable to political shocks.
Submitted February 01, 2017 at 06:05AM by Rutherford_Capital http://ift.tt/2kqataf
