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Calendar of Uncertainty will still haunt us in 2018

Posted January 16, 2018

David Worsfold

This time last year, as nervous eyes looked towards 2017, many were worried about the uncertainty that geo-political events could cause in the financial markets. Such worries were not without foundation as the Brexit vote and the election of Donald Trump were vivid illustrations of the extent to which the march of populism was shaping world events.

As 2018 begins, many of the worst fears for 2017 were not realised. We ticked off the key events on that Calendar of Uncertainty with sighs of relief.

2017’s Calendar of Uncertainty

  • Italian Constitutional Referendum
  • Inauguration of President Trump
  • Dutch Parliamentary Elections
  • UK triggers Article 50
  • French Presidential Elections
  • German Federal Elections

Yet, the uncertainty created by some of them still hangs over us and the consequences will have to play out in 2018.

The two biggest will be Brexit and Trump.

Impact of Brexit

Unforeseen this time last year was the possibility that UK Prime Minister Theresa May would risk a General Election straight after triggering the official Brexit process. This has left the UK with a weak minority government and a deeply divided Cabinet which has clearly failed to get a grip on the Brexit negotiations.

The biggest consequence of that is that London’s financial services sector is now preparing for a hard Brexit, with no deals on transition or cross-border trade. This means re-domiciling business with European Union clients and that will take with it senior management and investment functions. How this impacts on London in terms of jobs, trading volumes and new business flows we will only know after the UK leaves the EU at the end of March 2019.

Impact of Trump

The prevailing sentiment when it comes to President Trump’s impact on global markets is that it could have been a lot worse. Much of his talk and bluster has not been translated into action and where it has, the impact has been relatively benign.

At the Federal Reserve, where Trump’s dislike of Janet Yellen made her re-appointment for a second term impossible, the emergence of Jay Powell as her preferred successor has a reassuring feel. He is looking for continuity on monetary policy with gradual interest rate increases and withdrawing from the quantitative easing programme. On regulatory reform, he may be forced to be more radical.

Election hangovers await cures

Across Europe, the spate of national elections may have avoided the worst outcomes – which would have been far-right parties assuming office – but they have still left nasty hangovers.

The Dutch – potentially more sympathetic to the UK on trade in financial services – have been muted as they are still struggling to form a stable government coalition. The anti-immigrant Party for Freedom (PVV) led by Geert Wilders didn’t make the big breakthrough that was feared, but it grabbed enough seats to make forming a coalition without it almost impossible.

Germany joined the Dutch and the UK in the world of unstable governments following its inconclusive General Election. Chancellor Angela Merkel’s centre-right party lost seats and with them, its long-term partner in the so-called Grand Coalition, the social democrat SPD. Alternative für Deutschland, a rightwing party opposed to the Euro and further immigration gained a substantial foothold with nearly 100 seats in the Bundestag.

Merkel’s failure to stitch together a new coalition has left Germany facing the possibility of a second General Election just when the EU most needs clear leadership from Germany over Brexit.

At least things look a little calmer in France, where Emmanuel Macron and his La République En Marche! Party have a clear mandate for the market centric reforms that formed the centerpiece of their manifesto. President Macron hasn’t pushed hard to implement these reforms yet, as he is nervous about the potential for reviving opposition on the left and from France’s powerful trade unions but, so far, this shows little sign of finding its voice.

The big fear that Marine Le Pen and the far-right Front National could have a say in government has evaporated in the wake of Macron’s victory. This, in turn, has sparked a bout of party in-fighting in the Front National which has pushed it back to the margins of French politics – at least for the time being.

China plays the long game

Amid all this uncertainty, China continues to build its influence as a political and economic world power. It has its own domestic economic problems – not least with debt – but it continues to invest strategically around the world. Investors have had to learn to watch and listen to China’s leaders, as they search for those vital few points of additional return on under-pressure portfolios.

Of course, no investor needs to be told that uncertainty often has as much potential to create upside as it does downside, but searching out the asset classes that could benefit while maintaining a core of assets that will be the most resilient is no easy matter. We have had ten years of post-financial crisis ‘safety first’ portfolio management, especially with the added pressure of Solvency II in Europe. That now looks to be behind us and insurers are changing their attitudes on many assets.

The audience at the September Insurance Investment Exchange seminar certainly acknowledged that there will have to be some fresh thinking as we charge into 2018, although the overlay of uncertainty still induces a sense of caution. The dominant theme, however, as noted at the November event, remains unchanged – the continued search for yield, even as insurers hope for a return to more conventional monetary policies.


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