Time to deliver, ‘Perspectives’, March-April 2017

With President Trump’s plans to ‘reform and repeal’ Obamacare suffering a serious setback in Congress in March, attention is once again turning to the new administration’s plans for tax cuts and fiscal reform. The so-called ‘reflationary trade’, while in large part based on improving economic dynamics, also owes something to expectations that the new US administration will push through with other parts of its economic agenda. This means, writes Pictet Wealth Management’s (PWM) chief investment officer, Cesar Perez Ruiz, in the March-April issue of ‘Perspectives’, that there is potential for an increase in volatility, “especially if there is less than meets the eyes” in Trump’s economic plans. And just as doubts emerge about fiscal stimulus, the Fed has embarked on fiscal stimulus. “This could be an uncomfortable mix for certain assets,” according to Perez Ruiz.

But the CIO maintains his faith in risk assets, including equities, as hard economic data catches up with upbeat forward indicators and the climate for the global economy brightens. Two more rate hikes this year after the quarter-point rise in March will have an impact, but should not derail the US’s prospects, but PWM’s chief economist, Bernard Lambert, is convinced they “will only occur if economic growth is strong enough to support them”.

And what of the rest of the world? The French presidential election has focused attention on Marine Le Pen’s plans for ‘Frexit’, but Frederik Ducrozet, Senior Europe economist with PWM, believes that it would be “extremely difficult… to organize a legally binding referendum on EU/euro area membership”. Meanwhile, the Bank of Japan is forging ahead with its yield-curve control policy (YCC). Although some believe the Bank of Japan will blink, given the rise in interest rates elsewhere, PWM strategists Lauréline Chatelain and Jacques Henry think not, believing that that YCC “gives it all the flexibility it needs” to sustain its monetary policy, while limited foreign participation reduces the risk of a bond sell-off”.