|By Fisher Investments Editorial Staff, 02/15/2017|
In this podcast, we interview Content Analyst Elisabeth Dellinger on recent talk of protectionism, border taxes and trade.
|By Fisher Investments Editorial Staff, 12/12/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Brad Rotolo. (Recorded 11/3/2016)
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.
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|By Steven Russolillo, The Wall Street Journal, 02/24/2017|
MarketMinder's View: “Lost in the speculation about the Trump administration’s expected business-friendly policies were better-than-expected corporate earnings. With most S&P 500 companies having posted results for the final three months of 2016, it is confirmed that the biggest U.S. companies have started a new growth streak. More good news is expected in coming quarters, too. Fourth-quarter earnings are expected to log an increase of 4.6% from the same period a year ago, according to FactSet. That would mark the second consecutive quarter of year-over-year growth.” Yep. This is all strong, fundamental support for stocks. Though, that support’s continuation doesn’t depend on fiscal stimulus and corporate tax reform. Actually, the House’s present tax ideas seem to create more losers than anything, and markets might be better off without them. As for valuations, a forward P/E of 17.6 doesn’t mean trouble. Valuations aren’t predictive. Spiking valuations can indicate extreme sentiment shifts, but that isn’t evident in P/Es’ extremely gradual drift higher.
|By Richard Dyson and Richard Evans, The Telegraph, 02/24/2017|
MarketMinder's View: That force, supposedly, is an epic leadership shift from growth stocks to value stocks, and it is based solely on relative valuations and a strong belief in mean reversion. Trouble is, mean reversion is not a market driver, and averages do not exert gravitational force. You must have a strong, fundamental thesis to believe value stocks will outperform growth, and we don’t see one. Value usually does best just after a bear market, when they’ve been hammered so hard that earnings expectations are super easy to beat. Late in a cycle, after profits have recovered, value stocks have a hard time maintaining strong earnings growth, and investors’ preference shifts to growth stocks with more sustainable profits. Considering we’re eight years into a bull market, we’re at the time when growth shines bright. Value will have its day in the sun, but it probably comes after the next bear, when you probably want to own it the least because it appears to be hemorrhaging uncontrollably.
|By Neil Irwin, The New York Times, 02/24/2017|
MarketMinder's View: We really hoped the headline was a joke and the article would be all about how economies don’t have ceilings and “potential GDP” is an academic construct with no set definition and no practical use in the real world. Alas, this ticked only the “potential GDP is squishy” box, then spent a lot of time trying to figure out whether the US had reached its growth limit for this cycle. In addition to falling prey to the ceiling myth, it also erred by focusing on labor as the sole input to growth. But it isn’t, and hiring doesn’t drive expansion. Economies have three basic inputs: labor, technology and capital. Even if labor were maxed out (it isn’t), it wouldn’t really matter as long as capital were flowing freely (it is) and technology were bringing efficiency gains (it is).
|By Jennifer Kaplan and Polly Mosendz, Bloomberg, 02/24/2017|
MarketMinder's View: We regularly encounter commentary boasting that cannabis is America’s next great cash crop and a once-in-a-lifetime opportunity for investors to get in on the ground floor. We’ve always found that argument pretty hazy, and this regulatory tug of war is a big reason why. It’s also a big reason the fledgling industry can’t really access bank financing, necessary for broad expansion. We’d hate to see investors get too high on this only to see their portfolio go up in smoke. (Also we sort of have a theory that if the stuff is ever legalized federally, Big Tobacco will morph into Big Pot and take the industry over. Economies of scale and whatnot. But that isn’t an investment recommendation, just a far-fetched hypothesis.)
Market Wrap-Up, Thursday, February 23, 2017
Below is a market summary as of market close Thursday, February 23, 2017:
- Global Equities: MSCI World (+0.2%)
- US Equities: S&P 500 (+0.5%)
- UK Equities: MSCI UK (+0.7%)
- Best Country: New Zealand (+1.9%)
- Worst Country: Ireland (-0.9%)
- Best Sector: Telecommunication Services (+0.8%)
- Worst Sector: Materials (-0.4%)
Bond Yields: 10-year US Treasury yields fell 0.04 percentage point to 2.38%.
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.