Saker Nusseibeh questions the rationality of market exuberance when there is still massive uncertainty over the future economic and political landscape
As I write this article, I observe that the markets continue to advance strongly. The Nasdaq is up some 11%, the S&P 7%, the Euro Stoxx 11% and the Hang Seng 13%, and this after a 12% return for the S&P last year and a combined 8.8% for the MSCI ACWI. On the face of it, the markets seem to be signalling a sanguine picture of the world, driven partly by a lower for longer interest rate environment outside the US and a belief, first, in the positive effects of President Trump's proposed tax plans, and more recently by a strong earnings season in the US. At 25x Price Earnings Ratio in the US, and not much lower in developed Europe, investors must, therefore, be feeling positive about the world.
Meanwhile, outside of the rarified halls of financial institutions, the world seems to be going through a period of profound political upheaval, much of it still unresolved. The election of President Trump
The vote for Brexit was driven by similar disaffection, and Theresa May seemed to recognise this in her first speech as Prime Minister, and her subsequent allusions to utility bill pricing, worker participation in corporate boards and executive pay. However, the pay-off the Brexit voters were hoping for, inclusive of the £350m extra each week for the NHS and an increase in real spending power, is unlikely to result from the negotiations with Europe, which in any case will be protracted and uncertain. As in the US, the beneficiaries of Brexit will most likely be the well-off. Similarly, in France, we may rejoice in President Macron's 66% win, but the fact remains that 34% of those who voted in the home of ‘Liberté, Egalité, Fraternité', chose a modern day National Socialist candidate!
In The Most Venerable Book, the blue print for Chinese bureaucracy over millennia and wrongly attributed to Confucius, the author declares, "And bear in mind that virtue is the basis of good governance, and governance is deemed to be good if it contributes to the well-being of the people". The author(s) then warn(s) leaders: "A leader should be loved. Who should be feared? The people". Trump might have been loved by his voters, Prime Minister May might be en route to an electoral victory on a scale not seen since the early days of Thatcher, and Macron might be seen as the knight in shining armour. However, the truth is that the constraints of the economic situation and the inevitable progress of technology (the rise of robots to replace labour), means that it will be very difficult for them to deliver what the angry electorate were actually voting for, and that ‘love' that gave them their mandate might eventually turn to something nearer disaffection and anger and therefore to political instability.
If we combine that with increasing instability in developing countries (North Korean posturing and Russian dreams of Czarist imperial glory) it becomes increasingly hard to understand the rationality of market exuberance at this juncture of massive uncertainty about the future economic and political landscape. Then again, as Keynes famously said, "Markets can remain irrational longer than you can remain solvent".
Saker Nusseibeh is chief executive officer at Hermes Investment Management
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.
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