Happy New Year to everyone and let’s hope 2017 is a prosperous year for everyone.
December was a very busy month for us with the launch of two new UCITS funds; the Stratton Street NFA Global Bond Fund launched on 30th November and the Stratton Street Next Generation Global Bond Fund launched on 16th December. With our Renminbi Bond Fund strategy, we now have three Luxembourg UCITS vehicles to complement our Guernsey PCC funds.
Looking forward, 2017 is going to be an interesting year. Against a backdrop of ageing populations in the “developed world”, voters are likely to continue to hope for a return to “the old days” even though there is very little prospect of that happening. Consequently, political change in the major economies is likely to continue with populist parties getting an increasingly large share of the votes. But whatever party is in power, one cannot escape the reality that economies cannot gain competitiveness by continuing to do things the same way things have always been done. There are plenty of difficult ways to gain competitiveness; through significant investment or by slashing wages, but the easiest one is to devalue your currency.
Which raises the question as whether Trump’s fiscal policies will achieve their goals. The short term impact is likely to be an increase in the budget and current account deficits and with the FOMC likely to tighten more quickly than might have otherwise been the case, the dollar is quite likely to rally further. But that is unlikely to make the US more competitive, quite the reverse. So don’t be at all surprised to see the US Treasury market flatten as investors look through the short term growth boost and start to factor in the combination of a stronger dollar and higher short rates on the longer term outlook for the US economy.
Which is why, after coming up with the Next Generation Global Bond Fund a couple of years ago, we were so keen to launch the fund at the end of last year. The flip side of a stronger dollar will be weaker exchange rates elsewhere. Somewhat perversely, Trump’s policies will help some of the emerging economies as they gain competitiveness if the dollar does indeed strengthen as we currently expect. Weakening currencies are bad news for indebted nations however, as their unhedged dollar liabilities rise as a proportion of GDP, but for the creditor nations, this will help their longer term prospects. In due course it will also present opportunities in some emerging currencies, although that may be a story for later in 2017 or maybe even into 2018. We shall see.
Markets are certainly interesting and anomalies remain numerous but for the time being at least, we still have a bias towards long-dated high grade bonds of the creditor nations.