Macroeconomic Outlook

The world is going through a complete tailspin at the moment where the collusion of political and macro-economic factors are taking over headlines. Starting off with the most powerful country in the world, the US, we can see that Trump continues to protect his anti-free trade stance. His recent meeting with President Xi at the G20 summit did prove to be positive towards the future of trade with Trump declaring that he will not impose tariffs on China from January next year. However, many analysts believe that this might just be a small stint to boost the markets as he continues to protect American jobs and promote wage growth.

Next we move on to the EU, where anti EU sentiment continues to grow. French protests against Macron on his taxation policies are bringing about much unjust to the economy. The “yellow vest” group are so much so demanding for President Macron’s impeachment that may bring about a new election with Marine Le Pen as the frontrunner. Another anti-Eu campaigner.  The EU’s disapproval of the Budget projections in Italy are sort of isolating them from the entire group and Germany’s inability to find a suitable replacement for Angela Merkel is bringing about more political instability in the nation known to be the leader of the EU.

Then there is the talk of the town, the UK. Brexit problems are causing havoc in the markets with the pound hitting all-time lows this year as Prime Minister May tries to get her deal through the house of commons. This deal which some say will make the UK worse of as when compared to having a no deal and prime Minister May saying that this is the best deal on the table and is in the best interest of the UK continues to drive markets down and ensue greater political instability which is proving to be a domino effect for the UK. The deal which will be voted for in the parliament on 11^th of December will go down in history as a very important milestone as a no deal might trigger a no confidence vote for the Prime Minister and may result in a new government being formed and a no deal as a result. Of course, a new referendum does have a possibility and the EU just announced that the UK can rejoin the Union if they want to.

Moving on to the middle East with growing tension between powerhouses Saudi Arabia and Iran.  Economic sanction on Iran increasingly weigh down on their economy and cause further tension in the country. The removal of the Iran Nuclear deal was not only a step back in promoting world peace in the future but also encourages remilitarization and anti US sentiment in these emerging markets. The killing of the Turkish prime journalist Jamal Kashoggi by what’s rumored to be carried out by the Prince of Saudi Arabia Mohammed Bin Sultan instills questions about how powerhouses are dealing with this. The US are refraining to comment so that it will not strain their relationship with the Saudi’s and this is bringing out the question of fair and equality in the world. The meeting in the recent G20 summit raised questions about the production of oil and the falling oil prices, and Saudi commented on reducing supply from January onwards which may cause and increase in oil prices in the near short term. This coupled with Qatar’s decision to leave the OPEC will lead to rising oil prices as well. Something that emerging markets that are dependent on oil cannot afford.

In Asia, free falling emerging market currencies due to the strengthening dollar and increasing oil prices are proving bearish towards the markets. Foreign direct investments have fallen and locals are stocking up dollars to avoid the continuous instability in their home currency. The Indian rupee for example is down more than 10% this year, Indonesian Rupiah is down 12% and short term sentiment for recovery does not look very pleasing. GDP growth estimates continue to be revised downwards for most economies as they deal with imported inflation and a lack of FDI. However, growth of the middle class in these emerging economies do bring some positive sentiment towards investing in the long term. Additionally, demand for consumer goods continue to increase and many MNCs looking to capture large market shares in these economies do venture largely to build its customer base. We can see this from the recent acquisition of Indian online retailer FlipKart by Amazon.

In Summary, short term sentiments for the markets look to be extremely volatile with many companies said to have reached their peak this year and understood to be overvalued. However, we can expect further corrections in these markets as investors continue to hedge their bets against increasing market volatility by investing in stronger positions that include the dollar due to rising interest rates. Regulation in financial markets strengthened by the Dodd Frank act and MIFID II does reduce excess leveraging by banks but we can estimate that growth in companies with good fundamentals in business will continue and that investors should look for opportunities in the market with strong operational efficiency and good capital structures.