New article from Tatton Investment Management: Surprises

26 January 2018

Stocks around the globe rose for yet another week while the US$ continued its downward trend. What made the week interesting, however was the change in direction of some variables that many had not expected. In the UK, economic growth for the last quarter of 2017 positively surprised forecasters with a rate of 0.5%, which was up from 0.4% for Q3 (and not down) and took annual growth to 1.8%, only marginally below the 1.9% of 2016 (still the worst since 2012).

This may still be too close for comfort and stall speed, but it is encouraging to note the expansion in the services and manufacturing sectors, despite the flagging consumer demand and disappointing Christmas retail results. 2.5% average wage increases were seen by some as pressure for the Bank of England to further raise rates, when actually, after inflation, the increase amounted to a 0.5% loss in purchasing power for UK consumers.

In the US it was the other way around, Q4/17 GDP growth was lower than expected, bringing the figure for the first year of Donald Trump in office to a meagre 2.3% - considerably below the 3% the president had envisaged.

Despite better upward momentum than in the UK on the back of strengthening consumer demand and sentiment, £-Sterling gained the most of all global currencies against the US$. Given there were only much smaller gains versus the Euro, it would seem that it was more the (trade) proximity to the accelerating Eurozone and the lower starting point of the UK’s currency, that allowed £-Sterling to regain its pre-Brexit referendum value against the US$.

Whatever the true reasons, the partial currency recovery will help to stem the inflation pressures on UK consumers and should the 2.5% wage growth momentum persist while inflation subsides, then there may indeed be better times ahead for the UK consumer and domestic demand.

The other surprise came once again from US politics - and it was not the fact that Washington’s politicians where once again prepared to shut down the entire US government controlled public sector in return for very little gain in political capital on all sides.

The real surprise came from the conciliatory tone Trump and his representatives adopted at this year’s World Economic Forum in Davos. On the basis that out of all the nationalists in his start of presidency line-up, only his quite extreme anti-global trade representatives have survived (Ross, Navarro and Lighthizer), there had been an expectation of confrontation at this unashamedly cosmopolitan gathering of the global leading class. Instead, Trump and his entourage turned away from confrontation to sales. ‘America first does not mean America alone’ was their forum mantra and they portrayed the US as the best place in the world to do business and invest.

There was the occasional whistling, booing and laughter but in general it appeared that the global business community has come to appreciate the business-friendly reforms delivered, rather than worry about the relentless barrage of un-presidential but inconsequential Trump tweets.

As such it may not be such a surprise after all, that out of relief over a more globally pragmatic Trump administration, US stock markets staged their best day since last March, despite the disappointing GDP numbers and slumping bond values.

Or is it that there is also an increasing expectation that the world economy is finally exiting the era of slow growth and entering an era where politicians’ efforts to ‘invest in the forgotten’ as Trump put it in Davos, leads to a resurgence of domestic consumer demand. This may indeed have the potential of returning the ‘old normal’ of decent economic growth that benefits not only those at the top of society’s pyramid but distributes progress a little more equally.

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