2017 Outlook: Part 1 – Another fine mess?
By Paul Gambles, MBMG Investment Advisory
While the election of Donald Trump was a major shock to many people on many levels, much of the shock value relates more to Trump’s own personality, especially the outrageous persona that he has created and developed during the last 2 US Presidential election cycles. Anyone who is totally shocked at the 2016 outcome needs to look back on the populist groundswell that Trump set in motion with the so-called birther movement and other controversies in 2011-2.
For investors, the key remains to separate our reaction to Drumpf the political cartoon character who ran for office and the policies of President Trump (however awkward we might find it to actually articulate those 2 words). By way of full disclosure, I realize that this isn’t as easy in practice as this rather high-octane outburst on CNBC highlights.
A Google search shows almost 7,000 hits in the last week for one part of John Templeton’s famous aphorism “be fearful when others are greedy” whereas maybe Kipling might be even more apt –
“If you can keep your head when all about you are losing theirs…”
It seemed that the immediate reaction to the result was for people to lose their heads – the bounce in growth, infrastructure spending and interest rate expectations all seemed to be overdone for reasons that are explained below. This created risks and opportunities in roughly equal measure. But the key is that when Donald John Trump becomes the oldest American to take up Presidential office on 20th January, he’ll be faced with the same challenges and issues that faced his predecessor.
Trump’s rhetoric may be inflammatory but his expected policies (which in many ways aren’t dissimilar to those proposed by Clinton) probably aren’t. It’s important to remember that American voters, or at least the around 24% who voted for Trump, have cast a protest vote because, presumably, they have something to protest about. We might not agree with the way in which the protest has been expressed but that doesn’t mean that we can ignore the facts that Trump, Brexit, Movimento 5 Stelle, Front National et al are all exploiting or protesting against perceived conditions: social, political but I would argue ultimately economic. Enormous structural economic problems remain and it is the evolution of these, rather than the personality of the new tenant of 1600 Pennsylvania Avenue, that will be the factor that ultimately dictates outcomes.
In that sense, Trump’s victory is just yet another step in the slow grind towards clarity. As before, any attempt to devise an asset allocation solution that encompasses this necessarily needs to be flexible and also needs to continue to focus on adapting to the short term.
Uncertainty remains far greater than at any other time in my career and the range of potential outcomes has never been greater. The key points to note are that, in real terms, asset prices are both extremely high and also divorced from underlying economic fundamentals – largely because leverage remains close to, or in some cases such as China, at all-time highs. As the ability to increase leverage is a key driver of growth and of asset valuations, and as this can’t continue indefinitely, this really leaves us facing extreme outcomes.
At an event in October, my fellow panel members and I were asked in what assets people should invest and what return they should expect. Some of the answers given were anything but straightforward, reflecting that the investment outlook today is perhaps the most challenging in living memory.
For the last four decades, five-year investment returns have been relatively consistent from period-to-period. With the unprecedented levels of real return available from most asset classes during this time, it has served to make asset allocation far easier than it might be in the years ahead.
History has taught that a particular asset class exhibits reasonably consistent return expectations over time:
The best data I'm aware of are the valuations compiled by the Amsterdam authorities for Dutch property tax purposes, dating back to 1628. The message is clear; although values may depart from the trend by quite a significant variance for sustained periods, ultimately property - while also producing rental income - has increased in price over the very long term roughly in line with the rate of inflation.
Everyone knows that equities produce better long-term real returns than other asset classes such as property. Maybe everyone's wrong? If we adjust today's DJIA for inflation, that would be equivalent to a level just below 2,000 points when the index was created. Despite the recent volatility the Dow now sits above an impressive nine times that level. In other words, stocks would have to fall by almost 90 percent to mean revert (as they did the last time that they were as overvalued as this in the late 1920s).
The interest rates on government debt also tracked inflation extremely tightly for a significant period until the early to mid-1980s when rates negatively diverged (i.e. became much lower than inflation). This of course resulted in the prices of bonds increasing correspondingly.
In Part 2, I will examine ways to manage risk in these tumultuous times. If you would like to receive Parts 2 & 3, please subscribe to MBMG’s weekly Update
Paul GamblesMBMG Group, Bangkok, Thailand
T: +66 2 665 2536
Paul Gambles is co-founder and managing partner. He is licensed by the Thai SEC as both a Securities Fundamental Investment Analyst and an Investment Planner. Paul is also well-known as an expert commentator, appearing regularly on Bloomberg TV, CNBC and Channel News Asia. He also writes the weekly newsletter MBMG Markets Flash, regular Updates and articles.
MBMG Group was founded in Asia in 1996 and has since grown steadily. It offers services ranging from investment advisory, corporate advisory, tax advisory, family office, accounting and audit, legal, insurance, estate planning and property solutions.
Published: January 2017 l Photo: Andrew - Fotolia.com