Economic and Strategy Viewpoint - April 2017

Is populism good for markets? (page 2)

• Populist policies appear to be good for markets, which rallied following the Brexit vote and rose further on the election of Donald Trump as US president. The performance of the US and UK economies has certainly been better than expected, but whilst US activity is holding up, UK activity looks set to slow as Article 50 is triggered and uncertainty continues to weigh on investment
• The US market is trading on a high rating and could be vulnerable to setbacks in Congress which challenge the president’s pro-growth agenda. Although, in our view if lawmakers restrict fiscal stimulus this may help by removing the threat of inflation and tighter monetary policy
• Looking further ahead, populist policies to restrict trade and migration are likely to lead to stagflation, an outcome that is not friendly for markets.

Eurozone: France heads to the polls as the ECB considers policy (page 10)

• Following the election results in the Netherlands, investors are now focused on the French presidential election, where opinion polls suggest the odds of a Le Pen victory are low and diminishing. The election still poses a risk given Le Pen’s policies, but if Macron were to win, investors could flock back to European assets
• Meanwhile, the European Central Bank’s tone has turned more hawkish following the rise in headline inflation above its target. This is expected to be temporary and is unlikely to warrant a response from the Bank in the near-term.

UK: Budget U-turns and the inflation up-turn (page 13)

• Chancellor Philip Hammond has performed a spectacular U-turn in cancelling the national insurance tax increases on the self-employed, but he is hardly the first Conservative party Chancellor to do so. Yet, his actions beg the question of how he will he tighten fiscal policy further from here
• UK CPI inflation is soaring thanks to energy inflation dynamics, but also the fall in sterling. Companies are passing on much of the rising cost of materials on to retailers and consumers. Meanwhile, the Bank of England has a hawk in its midst, but is unlikely to change its flight plan anytime soon.

The global upswing and the EM rally (page 17)

• Trade and emerging market equities have risen together in 2017, but we do not believe the upswing is secular. Instead, it looks like a cyclical bounce which will likely fade as we move into the second half of the year.

Views at a glance (page 21)

• A short summary of our main macro views and where we see the risks to the world economy.