The Daily Update - Uncertainty and Inequality in 2017

We’re only a few days in to 2017 and Brent oil has already touched $58 per barrel, 11 companies have sold a record $20bn of debt since US financial markets reopened for the New Year and the FTSE 100 has steadily climbed over the holiday period to reach a new all-time high, yesterday clocking over 7,200. But in contrast to these zeniths, overall optimism is still far from all-time highs; as it seems markets are trying to capitalise on short term opportunities whist remaining bearish of longer term prospects. For by no means have all of the root problems of the 2008 Global Financial Crisis been put to rest. Stock markets and major housing markets (on an average but diverging basis) have rebounded, unemployment in many major economies has receded, banks are typically better capitalised; but global deleveraging remains at a snail’s pace (or in reverse), inequality not only remains high but has become a dominant driver for popular and political discontent, currency volatility has increased and these prolonged economic strains have taken their toll on foreign relations going forward into 2017.

Regarding inequality, today has been branded ‘Fat Cat Wednesday’ on the basis that by midday today the average top executives, with a median salary of around £4m, would have already earned the average UK salary of around £28k. Inequality was a chief influence in many of the economic events of 2016 and looks set to be a driver of reforms, remonstrations and rabble-rousing in 2017, not just in the US but across the globe. Greater imbalances between the wealthy and the indebted, both on the individual and country level, increases the risk of instability - with the greater risk falling to those already worse off. This applies to the average disenfranchised US Trump voter who may find that the President of 2 weeks’ and 2 days’ time may inflict worse economic consequences through potential policies that could damage many globally interdependent US industries. But it also applies to countries that have large net foreign debts - particularly those that are denominated in dollars and those countries that have already expended much political capital in the past 8 years of can-kicking.

In an interview today Lawrence Summers, former US Treasury Secretary, called the incoming presidency, ‘Probably largest transition-ideologically and in terms of substantive policy that we've seen in US in last 75 years’ and that markets are still failing to account for the uncertainty this has on global markets. In such uncertain times - yet with longer term global prospects little better now compared to 12 months ago - the merits of maintaining a position of high grade creditor country value bonds is clear. Such creditor countries’ debt should be less vulnerable to both a possible US and dollar rally or the possibility of US policies damaging global growth. In the meantime, as 2017 unfolds, we remain confident that our investment process and philosophy will help us identify value opportunities that arise from any market adjustments.