From Brexit and Trump to Italy, Brazil and the Philippines, 2016 has been a year of political upheaval and theatrics. And it isn’t over yet. South Korean President Park Geun-hye is embroiled in an influence peddling scandal that has outraged the country and likely numbered her days in office. She has offered to step down from office in April 2017—10 months before her term is slated to end—but lawmakers in the National Assembly instead introduced an impeachment bill, which gets a vote Friday December 9. While Park’s political fall looks inevitable, Korea’s political issues needn’t derail its other positive drivers. For global investors, whether or not you own any Emerging Markets stocks, this is another lesson in the importance of thinking long-term and not getting hung up on short-term events.
The movement against Park appears more about her actions (which you can read all about here), not a broader distaste with the government or the state of society. After decades of chaebol (Korea’s huge, family-run mega conglomerates/corporate fiefdoms) dominating political decisions and the economy, corruption has emerged as the societal cause du jour (see this summer’s draconian corruption bill), and Park appears a victim of the times. The scandal also coincides with some economic softness, as a slowdown in global trade hit export-oriented businesses hard. In response, the country’s largest sectors—which account for a fifth of GDP and employ nearly 15% of the workforce—have undergone significant corporate restructuring. More recently, scandals at several chaebol only further weighed on sentiment.
South Korea has also faced some geopolitical uncertainty in recent months. Besides long-running issues with North Korea, which has made progress in its nuclear program, new tensions with China have arisen as South Korea recently deployed an advanced US missile system. In addition, Donald Trump’s victory made many call into question the future of Asia’s trade relationship with the US given his campaign rhetoric and dismissal of the Trans-Pacific Partnership. There is also a potential domestic political headwind, as the legislature’s opposition party favors tax hikes, with eight different proposals put in the supplementary budget bills. With one of the world’s stronger fiscal positions (40% debt to GDP), such a move makes little economic sense, but the negative fallout is likely short term.
There’s more where that came from. Photo by yodiyim/Getty Images.
At long last, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to cut production on Wednesday. While details are scarce, comments from oil ministers indicate the group will cut oil production to 32.5 million barrels per day (Mbpd), from recent levels of 33.5 Mbpd. Despite the hype, however, the change is basically window-dressing. It probably won’t much alter global supply or improve the outlook for Energy firms. Their earnings are tied to oil prices, which likely remain lackluster for the foreseeable future (albeit with short-term volatility).
This is OPEC’s first official action of this sort since oil began crashing in 2014. OPEC surprised markets that November by declining to cut production, as had been widely expected at the time. Oil supplies were growing briskly, primarily due to new output from US shale production, which got a boost from developments like horizontal drilling and hydraulic fracturing. The resulting oversupply led to the last two years of oil weakness. With Wednesday’s agreement to cut production, OPEC is arguably moving back to its traditional role of attempting to target a price range for oil.
In a year where populism has swept the ballot box, is Italy next? On December 4, the country will hold a referendum on whether to reform the size, powers and appointment process for Parliament’s upper house, the Senate. If the referendum is approved, the Senate’s powers would be greatly curtailed and size reduced. It would shrink from 315 members to 100, the government would no longer have to win a Senate confidence vote, fewer measures would require Senate approval and senators would be appointed by Italy’s Regional Councils instead of directly elected. If passed, it would foster government stability and make it easier to pass badly needed reforms. But if it fails, many fear it will destabilize Italy’s pro-euro government, potentially propelling anti-euro populists to power and raising the risk of a domino effect across the eurozone. In our view, however, fears of broader market impact are likely overstated.
Prime Minister Matteo Renzi proposed the referendum to mitigate the Senate’s ability to block legislation and increase the Italian government’s stability, through elimination of one confidence vote. However, he also indicated his government will step down if the referendum is defeated. Opposition parties, such as the Five Star Movement (M5S), are against the referendum, as they believe it gives too much control to the Prime Minister. Many believe a Renzi resignation could give M5S an opening to enter the national government.
Italy doesn’t allow the publication of polls 15 days prior to an election or referendum, but the last polls indicated the “No” vote was ahead by about three points. PredictIt, a betting website similar to the late, great InTrade, puts the odds of the “No” vote prevailing at ~80%. But as US elections and the Brexit vote showed, polling and prediction have been unreliable lately. The considerable number of undecided voters (~20%) also suggests any poll isn’t conclusive.
|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Scott Botterman.
|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Austin Fraser.
Political uncertainty is stoking fear across much of the developed world. In the US, pundits pontificate about the potential negative market impact from either a Donald Trump or Hillary Clinton presidency. Similarly, recent and upcoming votes in the eurozone’s four biggest economies—Spain, Italy, France and Germany—have contributed to an environment of fear and loathing across the Continent, causing many to miss the region’s overall fine economic results. Time and again, forecasted political “disasters” have had a limited impact on the fundamental environment in Europe. The Brexit vote increasingly appears to have had little economic impact, with the most recent data pointing to the 14th consecutive quarter of expansion in Q3. Even long-beleaguered European Financials stocks are doing better, as issues like negative interest rates and regulatory changes have failed to live up to fears. While the upcoming votes might bring minor political shifts, all appear unlikely to result in big, sweeping change. Instead, they likely push governments deeper into gridlock—an underappreciated positive—which reduces uncertainty and legislative risk.
Spain is likely headed to its third general election in a year after its fragmented parliament failed to form a government following June’s election. Prime Minister Mariano Rajoy of the center-right Popular Party (PP) was unable to win a confidence vote to form a minority government with upstart, centrist Ciudadanos. If neither Rajoy nor the opposition Socialist Party is able to form a government by Halloween, Spanish voters will return to the voting booth—potentially on Christmas Day.
|By Christo Barker, 03/28/2016|
Financials stocks took it on the chin during 2016’s first six weeks, as investors freaked out over banks’ Energy exposure, eurozone banks’ capital ratios and bad loans, and negative interest rates. While these issues have impacted sentiment, in our view, they are overstated or misperceived. Energy loans lack the balance sheet exposure to ripple systemically. Negative interest rates are poor monetary policy but apply only to a tiny portion of global bank reserves. Bank lending is improving in most of the world, including the US and Europe, and bank balance sheets are the healthiest they’ve been in a generation. We believe the US and European financial systems are quite healthy and the risk of another near-term financial crisis is extremely low.
1. Potential Energy Loan Defaults Lack Scale
In the US, Energy loans account for just 3% of total loans—tiny. Overall, US banks were already conservatively positioned with 1.5% of loans set aside to cover all potential bad debts. Even with this conservative buffer, banks modestly stepped up these provisions as a precautionary measure, further limiting potential energy fallout. Just 6% of outstanding Energy debt globally is on bank balance sheets, while 86% is in the bond market. (Exhibits 1 and 2)
Some compare Energy loans today to subprime mortgages and 2008’s financial panic, but these fears lack credibility. Banks’ real estate exposure in 2007 amounted to 110 times their Energy exposure today. Plus, that 3% balance sheet exposure to Energy includes loans to huge integrated firms and state oil companies—neither have legitimate default risk. Even if half of the outstanding Energy loans were to default—extremely far-fetched—the conservative position of bank balance sheets is well-positioned to limit any major fallout from such an event.
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|By Staff, The Wall Street Journal, 12/08/2016|
MarketMinder's View: Many still seem to buy the antiquated notion China trades unfairly by keeping the yuan artificially low, thereby undercutting goods produced elsewhere. That may have been partly true in, say, 2005. But it isn’t 2005. “These days China is intervening in the capital markets to prevent the yuan from going into free fall. The currency is now close to an eight-year low, down 12% from its peak in January 2014. One irony is that Mr. Trump is contributing to the yuan’s fall with his critical tweets about China, as traders see economic trouble ahead. The Chinese government has tried to slow the yuan’s fall by selling dollars—in essence manipulating the currency in the opposite direction of Mr. Trump’s accusation. As a result, China’s reserves have shrunk to $3.05 trillion in November from $3.99 trillion in June 2014.”
|By Tae Kim, CNBC, 12/08/2016|
MarketMinder's View: The indicator is the Shiller P/E, or cyclically adjusted price-to-earnings ratio, or CAPE, and this is a wholly misleading analysis for three primary reasons.
- It overlooks a slew of false reads at these levels in the monthly series during much of 2004 and 1996 through 1999. That many errors should give you pause.
- The Shiller P/E, which compares prices to 10-years of bizarrely inflation-adjusted earnings, is highly skewed and backward-looking due to the calculation. It also wasn’t created to foretell cyclical turning points, but rather, to set expectations of the next decade’s returns, which it also doesn’t do well.
- Even if you knew for a fact the next 10 years would be awful, that isn’t actionable information in the sense you don’t know the progression. The first seven could be great and last three awful. Wouldn’t you want to capture the first seven and then take action? Additionally, you’d have to know what your alternatives were throughout that period, and this doesn’t help.
Finally, no price-to-earnings ratio reliably predicts markets’ direction. Expensive stocks routinely rise and cheap ones fall. Predicting the market just isn’t as easy as using the one market metric basically all investors know.
|By Claire Jones and Elaine Moore, Financial Times, 12/08/2016|
MarketMinder's View: This article spends a great deal of time debating whether the slower monthly pace of bond purchases by the ECB is the same as tapering by the Fed in 2014, prior to it ending its quantitative-easing bond buying. Here is a hint: It is. The only difference is they also tweaked the target of purchases, allowing the ECB to buy debt with maturities as short as one year. The effect of that seems to be even further reducing pressure on long-term yields. Now, here is the key thing that this article gets exactly wrong: There is no evidence the ECB’s QE is or was stimulative, and much more evidence that tapering and ceasing QE in the US and UK led to faster loan growth. Hence, fears over what to call this—and admit it is tapering—are wildly, horribly, remarkably off base.
|By Keiko Ujikane, Bloomberg, 12/08/2016|
MarketMinder's View: When Japanese Q3 GDP was initially estimated at 2.2% annualized, we told you on these pages that “a look under the hood” suggested weaker conditions than the headline data. That is still the case, if not more so, even after the headline figure was revised down to 1.3%. Net exports were the biggest growth driver, with falling imports inflating a contribution from rising exports. Business investment was revised from flat to -0.4%, and consumer spending was quite weak. Inventories, which are subject to interpretation, were also revised down—and considering the long-running weakness in consumption, that seems to us to signal businesses’ outlook isn’t bullish. That said, revision to GDP’s methodology bullishly discussed here (adding R&D to business investment) is oddly off: “‘GDP growth wasn’t quite as strong last quarter as initially reported, but this was more than offset by upward revisions to previous quarters,’” said a guy paid to analyze economic data. Refining a metric is fine, but presuming that an ongoing weak trend is somehow overridden by methodology changes impacting mostly the levels of GDP from years ago is bizarre.
Market Wrap-Up, Thursday, December 8, 2016
Below is a market summary as of market close Thursday, December 8, 2016:
- Global Equities: MSCI World (+0.2%)
- US Equities: S&P 500 (+0.2%)
- UK Equities: MSCI UK (-0.0%)
- Best Country: Japan (+1.0%)
- Worst Country: Austria (-1.4%)
- Best Sector: Financials (+0.8%)
- Worst Sector: Consumer Staples (-0.3%)
Bond Yields: 10-year US Treasury yields rose 0.06 percentage point to 2.40%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.