Update May 2017 Fewer and fewer worries…

We have noted for some time that the economy is displaying few symptoms of ‘late-cyclical’ behaviour, in spite of the length of the current economic cycle. Inflationary pressure remains low. Yet in April the start of a trend could be discerned that points to late-cyclical behaviour on the financial markets. The mergers and acquisitions engine has moved up a gear. Moreover, the M&A-activities are increasingly being financed with debt whereby companies are taking a lower credit rating for granted. Yet, these bonds are still easily placed. This is typical corporate behaviour in an environment in which there is still a large gap between the returns on and the cost of capital. Shareholders profit.

Macron new French president

Emmanuel Macron won the French presidential elections. While the financial markets responded enthusiastically after the first round of voting, there was a muted reaction to the second round. We believe this was due to the markets already having largely priced in the election victory. Furthermore, it is still far from certain whether Macron will succeed in boosting European cooperation and implementing drastic reforms. French parliamentary elections are scheduled for June. Without an absolute majority in parliament or a viable coalition, there are high implementation risks. Yet the French election result has led to a reduction in political risk for Europe. Combined with the positive economic outlook, it could be a reason for the European Central Bank to end its easy money policy. However, the ECB saw no reason to hint in this direction.

UK Prime Minister May surprises markets by announcing early general election

For British Prime Minister May, the implementation risks were reason to unexpectedly call an early general election last month. The UK will now go to the polls on 8 June rather than in 2020. The election campaigns of the various parties will undoubtedly revolve around the terms and conditions of the Brexit. In calling an early election, May hopes to strengthen her mandate. Something which investors seem to expect will happen given the rise in the value of the sterling. The Brexit already looks to be turning into a messy divorce between the EU and UK. Not only is there a risk of deadlock on the sequence of negotiations, but also on the Brexit bill. It consequently seems less likely that a good deal will be struck. The UK economy is already starting to feel the impact of the decrease in the value of the GB pound since the referendum and of higher oil prices. First-quarter growth was considerably lower than in the last quarter of 2016, chiefly due to lower growth in the service sector. We expect this slowdown to persist.

 

“The Brexit already looks to be turning into a messy divorce between the EU and UK.”

Trump’s first 100 days

In the US, Trump has now been president for 100 days. Although he got off to a flying start by signing executive orders, he has not yet succeeded in pushing significant changes to legislation through Congress. However, he did present a ‘major’ tax plan at the last moment, which so far looks more like his wish list from the election campaign: tax cuts for the middle class and for businesses. The plan contained no financial information to back it up and it is questionable whether it will remain intact later this year. US economic indicators were worse than expected last month. The market lowered its expectation of interest rates being raised, leading to a fall in US government bond yields. For the US central bank (the Fed), however, these weaker data were not seen as reason to amend the direction of monetary policy in early May. The Fed is convinced that the downturn is temporary and is keeping the door wide open for a further interest rate increase in June, causing the market to relinquish its cautious stance.

Someday, somebody somewhere will do something stupid

Compared to previous years, there is undeniably more uncertainty but the economic environment is also better. Both interest rates and volatility on the financial markets are extremely low. Market sentiment is providing support for everything that involves risk. For the time being, we see no reason to change direction in the short term. Experience tells us that such situations do not last forever. In this cycle, too, someday, somebody somewhere will do something stupid and volatility will return. Only we believe it won’t happen just yet.

 

Disclaimer
Kempen Capital Management N.V. (KCM) is licensed as a manager of various investment funds and to provide investment services and is subject to supervision by the Netherlands Authority for the Financial Markets. This information may not be construed as an offer and provides insufficient basis for an investment decision.

Ruth van de Belt
Marius Bakker
Ivo Kuiper

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