New article from Tatton Investment Management: Movements

29 September 2017

It has been a week full of political movements and stock markets managed to regain ground lost over the previous week.

In Germany chancellor Merkel’s governing coalition lost 14% of the vote to the populists of the AfD, but Angela Merkel will continue as head of the government as had been expected. She will be forced to govern with a differing coalition after her previous partners, the centre left SPD refused to carry on and instead will attempt to regain voters trust in the opposition. However, do not expect too much change in German politics as a result – it may, however, busy Merkel’s top team a little more than before to hold such a coalition with two new coalition partners (Greens and Liberals) together. My hope that focus would finally turn to navigating towards are more constructive Brexit framework could therefore be disappointed.

Luckily, France has with Emmanuel Macron a new president with a strengthened mandate, who took the opportunity over the week to inject life back into the European idea. In a landmark speech, he set out a strong vision for the European Union, which envisages a higher level of political cohesion, defence and very important for our perspective first steps to underpin the mal‑designed monetary union with a joint taxation approach. This would finally allow the issuance of true EU government bonds and thus at long last provide its central bank, the ECB, with the instruments of a properly empowered central bank. Merkel’s positive comments give hope that we may witness the resurrection of the powerful Franco-German axis, which under Kohl and Mitterrand led to the last peak of EU progress. Let us hope they do not forget Britain’s Brexit needs in the process!

In the US, Trump for once made headlines with a truly constructive tax reform outline, which did not mention the destructive border adjustment tax but proposes that the US corporate tax system finally follows the territorial tax base approach rather than continuing to insist on its global approach which results in double taxation unless US corporates engage in all sorts of damaging tax mitigation tactics. His proposal was ridiculed by many, but it would seem to us that this has almost become a Pavlovian reflex. His bundle of tax reform proposals has the potential to add significant additional growth momentum to the US economy and if designed properly should be able to pay for itself over the medium term – just as the last successful US tax reform under Ronald Reagan did.

Trump’s chances of getting at least some form of tax reform through Congress are far, far higher than his Obama Care repeal bill and as such we suspect that the markets underestimate the chances for success – given their muted welcome to his announcement.

Moving further East, ‘Rocket Man’ Kim Jong-Un kept relatively quiet over the week, but I suspect this will not last. China and Japan on the other hand are seeking political mandates from their respective power bases. We wrote about the 19th Party Congress in China last week. This week the Japanese prime minister Shinzo Abe surprised his country by calling snap elections for October. Given that he has actually managed to drive the Japanese economy forward further than any of his predecessors of the past 25 years, we wish him more luck than his British colleague experienced in June.

I suspect many people look anxiously East these days and wonder whether we will witness the first thermos nuclear conflict in a lifetime and the shock potential this may have for capital markets. We would side with the muted response from capital markets, where the South Korean stock market index has even risen over 30% this year. Clearly, the threat has to be taken serious but the North Korean dictator will be aware that he would most likely pay with his life for a nuclear attack and thus, for the time being this remains a rather unnerving ‘game of chicken’ rather than a ‘hot conflict’.

With the moving parts in politics over the coming weeks, the central banks’ determination to bring the era of extraordinary monetary easing to a gradual end and the upcoming quarterly corporate earnings announcements, there is plenty ahead to keep capital markets in suspense. October is a month that has historically seen some extreme market movements and so market participants will be nervously eyeing latest developments. But then, the same is true for September and similar concerns were raised at the end of August and we now look back to positive stock market returns for the past month. We will therefore continue to be on our guard about the short-term impact potential of the various unfolding scenarios, while we do not lose track of the positive longer term picture of a gradually and consistently improving global economic growth environment.

I would like to end this week with a rare mention of a Tatton business matter which the whole team is rightfully proud of. Tatton Investment Management was voted Best Discretionary Fund Manager by the 2017 Money Facts Awards. Having won this coveted accolade against our venerable competition of much longer established and in many instances far larger competitors is a wonderful recognition of what we have been able to achieve for our investors over the past 5 years.

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