MARKET COMMENTARY - November 2016

 Recent Days 

The U.S. stock market is partying like it’s 1999. For the first time since that year, the four major benchmark indexes hit all-time highs, thanks to an ongoing post- election rally that has lasted for three weeks and lifted almost everything from banks to industrials to small-cap stocks. Investors kept piling into equities for the week, with the amount of money deposited to exchange traded funds since the Nov. 8 vote accounting for almost 40 percent of this year’s total. About $1 trillion has been added to equity values since Donald Trump’s victory, driven by speculation that his plans to cut taxes and boost fiscal spending will accelerate a rebound in corporate profits.

Brexit

Germany’s finance minister Wolfgang Schäuble has set out a tough line on EU divorce talks with Britain on issues from tax breaks to exit costs, dashing Downing Street hopes Berlin would soften Europe’s stance on a UK departure from the bloc.

Appeal or not to Appeal: That is the question? It is one of the most important constitutional court cases in generations. The result creates a nightmare scenario for the government. TheresaMay had said she wanted to start Brexit talks before the end of March next year but this ruling has thrown the prime minister's timetable up in the air. Campaigners who brought the case insist it was about "process not politics", but behind the doors of No 10 there will now be serious head-scratching about what the government's next steps should be. This decision has huge implications, not just on the timing of Brexit but on the terms of Brexit. That's because it's given the initiative to those on the Remain side in the House of Commons who, it's now likely, will argue Article 50 can only be triggered when Parliament is ready and that could mean when they're happy with the terms of any future deal. Of course, it will be immensely difficult to satisfy and get agreement from all those MPs who voted to remain. Could an early general election be on the cards after all? Investment manager Gina Miller, who brought the case, said outside the High Court that the government should make the "wise decision of not appealing".

Outlook post the US Election

Heightened Uncertainty: Trumps election introduces uncertainty to the outlook for government policy, economic activity and the Federal Reserve. It is important not to overreact to this noise and instead wait for clear announcements of priorities.

Trade policy will be pivotal for the economy: Mr Trump has pledged to increase trade protection and cut back on immigration – policies that would simultaneously weaken the growth and lift inflationary pressures.

And the Fed: There is a greater chance the Fed will delay lifting interest rates into 2017 as it waits until there is more clarity on market and policy outlooks.

Prioritising tax cuts and relaxing regulation: Both the President elect and Republicans in the House of Representatives placed large tax cuts and corporate tax reform at the heart of their financial agenda.

Market Implications: The election result initially caused markets to move to perceived safer environments, with bonds rallying and riskier investment types, including equities declining substantially.

However, the immediate reaction turned around on an expectation that President elect Trump and Republicans in full control of Congress would agree to push through a business friendly programme. The longer-term implications for markets will depend on the actual policies of President Trump and what can be negotiated through Congress in 2017. If the new administration begins to aggressively undo previous policies that have supported globalisation, it is likely we’ll see a hit to investor sentiment and therefore an extended period of weakness for risk investments such as equities.

In summary: It is more important than ever to have a well-diversified portfolio, as it is taking a long-term view.


Three Golden Rules of Investing

  1. Make sure you’re properly diversified – If you are in only one or two types of investments, you are exposing yourself to quite a degree of risk. But if you diversify across different investments such as equites, property’s and bonds, it can help you achieve a much better balance between risk and return. Periods of market volatility are a valuable reminder of the importance of diversifying – of spreading your money across different types of investments, geographical locations and industries.
  2. Take a long-term view – Because when you do, you are much more likely to meet your all-important financial goals. It is easy to get caught up in the drama of short-term market falls – and the accompanying headlines. But try to remember that these fluctuations are a normal part of markets, keep your composure and remind yourself why you invested in the first place.
  3. Avoid locking in short-term losses – Over the longer term, stock markets often provide investors with higher returns than leaving money on deposit. Even when markets suffer short-term setbacks, history shows us that they recover in the long term. When markets fall you may be tempted to sell some of your investments, but if you do, you run the risk of locking in your losses and missing out on any future market recovery. But there are no guarantees – the value of investments can go up or down and may be worth less than you paid in. Past performance is not a reliable indicator of future performance.