PM May’s objective in calling a snap election was twofold. Firstly, she wanted to strengthen her parliamentary majority in view of the perceived weakness of the Labour party in polls. Secondly, she wanted to avoid having an election in 2020. TheBrexit process is scheduled to end in 2019 and having a longer political time horizon after this should help to keep negotiations isolated from domestic political issues.

The outcome of this election has resulted in a complete defeat on the first objective and a disappointing result, from the Tories’ point of view, on the second. If we look back to the significant divide shown by polls at the beginning of the election campaign, the result is a huge failure for PM May. This weakens her significantly; still, at the moment, it seems likely that she will form a government with a small majority with support from Northern Ireland’s unionist parties. Of course, this will inevitably influence the attitude of the government towards Brexit negotiations and could also trigger internal negotiations on national policies.

Will this result have an impact on Brexit negotiations?

This political outcome creates further uncertainty about negotiations. There are a number of open questions, starting from what PM May will decide to do given the scale of her defeat and what combination of coalition parties will be formed to govern. We expect to find an answer in the coming days. What is certain is that a hard Brexit (as presented in the Tories’ political manifesto) is now at risk. Moreover, the usual political frictions present in a coalition government will make formulation of a firm Brexit strategy on the UK side even more difficult, which could weaken the UK’s negotiating power considerably. The consequences are either an increased possibility of a no-deal outcome or the acceptance of an EU-driven agreement. What is likely, at this stage, is that the Tories will seek a convergence on the main Brexit guidelines included in their political manifesto, which included a confirmation that the government is willing to make a ‘reasonable’ contribution to the European Union after Brexit, albeit with a warning that ‘vast annual contributions to the European Union will end’, an exit from the single market and a common willingness to secure rights for EU citizens in the UK and vice versa. However, this won’t be an easy task.

What has been the economic impact of the Brexit plan so far?

In H2 2016, after the Brexit referendum, the UK economy proved to be much more resilient than what anyone would have expected, supported by strong private consumption at the expense of falling saving rates. The most immediate effect of Brexit was a strong depreciation for sterling, the effect of which, some months later, was to drive up inflation and squeeze real income, with negative implications for consumption. As a result, despite the improved contribution from net trade, GDP figures were softer in Q1 2017. Overall, UK economic indicators have been quite volatile and erratic recently, often providing inconsistent messages. Uncertainty will likely persist until it is clear what level of reorganisation the UK economy will need to undertake on the back of Brexit arrangements. However, this is a long-term issue.

What is your outlook for the economy?

According to our forecasts, inflation will peak at the end of 2017 at around 3%, averaging 2.6-2.7% in 2017, and will remain at these levels during 2018. At the same time, GDP is expected to grow 1.8% in 2017 and to slowdown in 2018. These forecasts deliver a slightly more pessimistic picture than that of the Bank of England (BoE), which has a rosier outlook for the medium-term and sees the economy closing the output gap towards the end of 2019. This difference is driven by the BoE’s view that the structural, sterling-driven inflationary pressures will decline in 2018, substituted by ‘endogenous’ stimulus coming from higher wages and internal demand, which should push the economy to stronger growth. Our view is that the depreciation effect will be more persistent, with wage growth lagging a bit more.

What do you expect from the BoE through the year-end?

In the latest Inflation Report Press conference, the BoE was a bit more confident on the economy and on smoother Brexit agreements than it had been in February. On the policy side, the BoE clearly faces a trade-off between the speed at which to stabilise rising inflation and the reduction of the current output gap: monetary policy will remain accommodative as long as the rise in inflation is sterling-driven and demand will start to pick up towards the end of its forecast horizon, when inflation will increase and close the output gap.

As noted by the BoE’s governor, the market implication is that if these conditions are met, then the path of monetary tightening could be slightly quicker than currently being priced-in. In our view, a more aggressive BoE is not likely, since we are a bit less optimistic about growth – now even more, given the increased political instability – and, notably, we see sterling-driven inflation remaining quite high in 2018, perhaps due to risks on the currency tilted towards depreciation. Therefore, we consider the path currently being priced by the market remains the most likely.

What is your outlook for Sterling?

Given the lack of visibility on the evolution of UK economic fundamentals, sterling has mainly been trading as a ‘political currency’, driven by news flow and investor expectations regarding the Brexit negotiations. With a weak government and political uncertainty emerging from this election, the path towards a smooth Brexit is less clear. The probability for a hard Brexit is now smaller, but the UK’s negotiation stance has likely been weakened and medium-term growth prospects for the UK could be dampened by the increased uncertainty, with negative implications for sterling.

Moreover, in the medium term, the Brexit decision supposes a number of structural shifts to the UK economy, in particular with regard to the weight and role of external factors. Specifically, a substantial loss of FDI (Foreign Direct Investments) could play a prominent role if London shrinks as a financial centre. Since the referendum, this has resulted in a sharp depreciation of the pound, but it has recovered some ground as markets started to discount the possibility of a ‘soft Brexit’ and on the back of economic resilience in the UK.

In addition, current levels of sterling are not particularly attractive from an interest rate differential perspective (UK vs US) and we do not expect a more aggressive stance from the BoE.

What about the yield curve?

Regarding the yield curve, we have to consider Labour’s call for higher taxes, spending and debt issuance, as well as their aim to bring some sectors back under national control. Furthermore, a government with a higher Labour influence would likely have a softer stance on Brexit, with privileged market access being seen as a focal point. A consequence of higher deficits and more debt is higher gilt issuance and a higher risk premium on long-dated rates. Also, increased intervention on the labour market might push up wages, increasing prospects for higher inflation. The BOE, while not immediately reacting, will be very wary of any signs of a sustained shift in inflation expectations and might react if needed. We expect the curve to initially maintain a steepening bias and UK rates to underperform on a cross-market basis.

From a multi-asset perspective, what is your assessment of UK assets?

As said, we do not consider sterling to be attractive. We consider the inflation linked bond market to be too dear, as it strongly benefits from the demand of local defined benefit pension funds due to current legislation; any change to this could put pressure on linkers. We prefer Japanese and European linkers.

We like European equities in general – without a specific bias to the UK market – and we prefer European and Japanese equities to the US, as we expect the boost from reflation policies could have more upside in these markets, where valuations are more appealing.

Overall, geopolitical risk could weigh on financial assets, triggering volatility. The recent escalation of terrorist attacks means that voters’ reactions and politicians’ actions are less predictable. We seek to manage potential spikes in volatility with hedging strategies and assets perceived as safe-haven, such as gold.

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The Conservative Party has 12 seats less than what it started out with on April 18 when May announced snap polls. However, it is expected to receive support from the Democratic Unionist Party (DUP), whose 10 seats will be enough to get past the 326 required to form a government.

And, despite calls from her party colleagues to introspect, it appears that May is determined to continue as prime minister, with support from the DUP.

She insisted that the country needs a ‘period of stability’. Referring to the Conservative Party having the maximum number of seats and the highest vote share, she said, “It is incumbent on us to ensure that we have that.”

Labour reinvigorated

Labour leader Jeremy Corbyn urged her to quit, saying he is ‘ready to serve’.”The mandate she’s got is lost Conservative seats, lost votes, lost support and lost confidence. I would have thought that’s enough to go, actually, and make way for a government that will be truly representative of all of the people of this country.”
The Labour Party feels reinvigorated after its tally went up by 29 seats. No one expected Corbyn to cause any headache to May’s efforts to secure a fresh mandate by calling for elections in April.

Notably, though the Tories have 60 MPs more than Labour, the gap in the vote share is not much. With both sides sticking to their stands, it appears that the Brexit negotiations will be a major challenge for the new government.

May has until June 13 to form a government, or make way. The talks with Europe are scheduled for June 19. While May sought a decisive mandate for the talks, what she has got is exactly the opposite.

Businesses seek clarity

Monica Defend, Head of Global Asset Allocation Research at Pioneer Investments, said, “This political outcome creates further uncertainty about negotiations. There are a number of open questions, starting from what PM May will decide to do given the scale of her defeat and what combination of coalition parties will be formed to govern.”

Nigel Green, founder and CEO of deVere Group, said: “The UK election result is a hammer blow for a hard Brexit. Mrs May no longer has the ability to deliver on this as she did even 24 hours ago, for two key reasons.First, the British people have spoken and largely rejected much of the Conservative manifesto, which championed a hard Brexit. And second, the leader of the Democratic Unionist Party, which is joining forces with the Conservatives to form a coalition government, have said they will not back a hard Brexit.”

Paul Marston, Managing Director of RateSetter Commercial Finance, said:“Without doubt, a hung parliament is the worst outcome for the business community. While politicians vie for position over the next few days, a shadow of uncertainty forms, meaning that small business owners are more likely to put their growth plans on ice until the political and economic outlook stabilises. However, UK small businesses have experienced coalition government before, and excel at adapting to new circumstances. So in the longer term, I am optimistic that we will see businesses continuing to invest, grow and create wealth and jobs.”

Ed Molyneux, CEO and co-founder of FreeAgent, said of the election, “This has been the most tumultuous election in recent memory, so is imperative that we get clarity over the identity of our new government and their plans for the future as soon as possible.”

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What is your take on the electoral result in the Netherlands?

After the annus horribilis in which several elections resulted in unexpected outcomes (admittedly without the much feared negative impact on asset prices), this time we have had a result that is in line with recent polls and will not lead to a tremendous change in the policy and political approach of the country involved. That said, a negative aspect is the fragmentation across parties of the result (also expected), which will likely be a source of instability and difficulty for the government.

It remains to be seen how the incumbent premier, Mark Rutte, will try to form a new government. It seems clear that any coalition will involve at least four parties, ranging from the center-to-right to the left of the political landscape (generally, ‘Pro-Euro’); during the campaign, he repeatedly ruled out any possibility of repeating a coalition with Geert Wilder and his anti-immigration Freedom Party.

Do you think this could influence the outcome of elections in France?

Success breeds success: this was apparent last year with the rise of the ‘populistic’ movements across the globe.  This result could, therefore, suggest that a peak in the appeal of these ideas is behind us and that a more constructive approach to policy and politics and, above all, to Europe is gaining momentum. So, yes, in our view, it could have a positive influence on the French vote.

What is your assessment of the risk of a Euro break-up and how has it changed over the last few months?

A break-up of the Euro is, economically speaking, an unacceptable event. European Central Bank President Mario Draghi abruptly clarified this concept when he stated the fact that any country exiting the Euro would need to clear its Target2 balances first (which for Italy amounts to around €390 billion).

But what if Euro-sceptic forces start taking the lead in a number of countries? We think a useful analogy here is to imagine the Eurozone and Europe are a cyclist that is going uphill. They cannot stop pedaling until they reach the top of the hill (i.e., when everything is in order, and clearly we are not there yet) otherwise they will start to go backwards and will, eventually, fall down in a heap. This may appear a bit extreme: on some issues, the progresses and benefits of the currency and Union are clear; but there are other mechanisms, particularly in the field of sharing risks, solidarity and common policies, that still have to be resolved. And these have been put under severe pressure given the scale of the recent crisis. The cyclist must arrive at the top of the hill and commence the downhill journey before the next crisis arrives. Yet, if Euro-sceptic forces gain appeal and power in the Eurozone and Europe, we see an increased likelihood that our cyclist stops pedaling.

Last year, starting with Brexit, the probability of a ruinous standstill in Europe rose materially, although it is still considered a tail event. Higher spreads between OATs (the 10 year French government bond) and BUNDs (the 10 year German government bond) are the market’s assessment of that probability (which does not including credit risk or sovereign default risk). Meanwhile, the issue of a Euro exit, or adoption of a different currency, is a recurrent theme – most recently in the electoral positioning of political parties in Italy – is another perilous sign.

The Dutch electoral result has enabled this risk to recede a little, but there are a number of political issues ahead: elections in France, Brexit with the complication of a second Scottish independence referendum, the still unresolved Greek question, and possible political instability in Italy to name a few.

How can investors deal with geopolitical risk within a multi-asset approach?

Geopolitical risk remains, in our view, the main factor for investors to watch over the next few months. Financial markets are too complacent ahead of the wave of elections in Europe: equity volatility is reaching new lows even though the probability of a country leaving the Euro, as highlighted by the Sentix Euro Break-Up Index, is trending towards post Brexit levels.

If we also consider the uncertainties related to the execution of Trump’s policies in the US, and of his potentially unfriendly foreign policy for some Emerging Markets, we see significant risks of disappointment for financial markets. This also considering extended valuations in many developed equity and credit markets.

Therefore, we believe investors should consider implement hedging in an effort to partially offset the negative effects of geopolitical risk. There are multiple strategies available for investors: lowly correlated assets, such as gold; currencies that tend to behave as ‘safe havens’, such as the Swiss Franc, and, especially in case of rising risks in the Eurozone, the US dollar; or the use of derivatives to try to protect risk asset exposure. A multi-asset approach, which includes hedging among its investment strategies, can be beneficial in a period of rising geopolitical risk. It can efficiently combine the most effective hedging techniques, determining cost-efficient strategies for those risk events deemed most likely and impactful.

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IFM Correspondent

November 14, 2016: Mortgage rates have quickly surged ever since Trump was declared the victor of the US presidential election. Rates modestly changed, with the benchmark 30-year fixed mortgage rate rising to 3.73 percent, according to Bankrate.com’s weekly national survey.

After results of the elections came out, financial markets expected turmoil. However, Trump’s acceptance speech soothed investors who were previously sceptical about a Trump victory.

The prospects of higher government spending and more government borrowing for infrastructure improvements sent long-term Treasury yields racing higher. The 10-year Treasury note yield soared above 2 percent on November 8, closing at 2.07 percent, the highest since January 22.

The benchmark 15-year fixed-rate mortgage rose to 2.97 percent from 2.96 percent while the benchmark 5/1 adjustable-rate mortgage rose to 3.15 percent from 3.14 percent.

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IFM Correspondent

November 14, 2016: Investors endured a rocky day of trading after the shock election of Donald Trump as the next US president sparked a bout of unusual volatility that rocked financial markets around the world.

Shares and bonds whipsawed violently as initial concerns about a Trump presidency gave way to cautious optimism that the businessman-turned-reality-television-star would be less divisive than originally feared.

The FTSE 100 dropped as much as 146.8 points at the opening of trade, only to recover remarkably and close up 68.71 points, or 1pc, at 6,911.84, a rally mirrored in Europe and the US. While futures on the Dow Jones Industrial Average at one point plunged more than 800 points, the US benchmark index was up 1.4pc, or more than 256 points, by the end of the day, just 0.25pc off its record high set in August.

Mark Haefele, global chief investment officer at UBS Wealth Management, said Mr. Trump’s acceptance speech, in which the Republican outsider with no government experience struck an unexpectedly conciliatory tone, soothed some investors’ worst fears.

“We clearly saw the market turn when Donald Trump began speaking and rather than continuing with divisive campaign rhetoric, thanked Hillary Clinton, said he would reach out to all Americans and the Democrats for guidance,” said Mr. Haefele.

In the early hours, before his speech, markets initially panicked as it became apparent he would win, with Japan’s Nikkei 225 stock index slumping 5.4pc and the dollar sharply weaker.

“We had a knee-jerk reaction,” said Phil Poole, head of research at Deutsche Asset Management. However, hopes that Mr. Trump will pursue pro-business policies that will stimulate economic growth, along with his overtures towards the Democrats, helped to spark a rally in the dollar and equities, and saw gold fade.

“He spoke about jobs, he spoke about lower taxes, he also spoke about infrastructure,” said Mr. Haefele. Investors are now betting that Mr. Trump’s focus on infrastructure spending and tax cuts will be inflationary. Treasuries, which had earlier been in demand, were sold-off and 10-year yields spiked as high as 2pc.

Stock markets were also buoyed by expectations among some investors that global central banks will keep monetary policy loose amid the uncertainty caused by Mr. Trump’s victory, although the consensus was still for the US Federal Reserve to hike rates in December.

“People have taken a view that this doesn’t change the over-riding importance of monetary policy and that monetary policy is going to remain extremely loose,” said Mr. Poole.

As the shock waves from the election rippled through the business world, JP Morgan boss Jamie Dimon warned employees in a memo that “we need to listen to those voices” that elected the Republican. Analysts also urged caution that investors should not be over-optimistic.

“If we look at all his pronouncements around policy, they’re not necessarily consistent, they’re not well fleshed out,” said Mr. Poole. “Investors need to watch very closely who Trump appoints, what his team’s going to look like and the extent to which that team is experienced. These are all going to be very important signals in determining just what kind of Trump we’re going to get.”

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IFM Correspondent

November 11, 2016: Iran’s President Hassan Rouhani said that US president-elect Trump will not be able to reverse the nuclear deal. He said there is ‘no possibility’ of the nuclear deal being annulled.

“The US no longer has the capacity to create Iranophobia and to create a consensus against Iran,” Rouhani told his cabinet, according to state television. “Iran’s understanding in the nuclear deal was that the accord was not concluded with one country or government but was approved by a resolution of the UN Security Council and there is no possibility that it can be changed by a single government.”

The agreement led to the lifting of sanctions on Iran in exchange for guarantees that it would not pursue nuclear weapons capability.

During his election campaign, Trump described the nuclear deal as ‘disastrous’ and said it would be his ‘number one priority’ to dismantle it.
Many Arab leaders rushed to welcome Trump’s unexpected victory in the deeply divisive US election.

Egyptian President Abdel Fattah El-Sisi was one of the first to congratulate Trump, saying he hoped his presidency would unleash a new era of closer ties with Washington. “The Egyptian Arab Republic is looking forward to the period of Donald Trump’s presidency to imbue new spirit into the path of Egyptian-American ties with more cooperation and coordination in the interests of both the Egyptian and American people,” he said.

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IFM Correspondent

November 4, 2016: US employers hired more workers in October and also hiked the wages of existing workers. Businesses added 175,000 jobs to the US economy in October and 156,000 jobs in September, while the unemployment rate ticked up to 5%.

“The expected payroll gains should easily meet the Fed’s criteria of some further progress in the labour market, which leaves us with a rate hike in December,” said Harm Bandholz, chief US economist at UniCredit Research in New York.

The economy continues to grow in terms of employment as well as economic growth. This could effectively cause the Federal Reserve to hike interest rates in December, as it is felt that the economy is capable of absorbing such a move.

The Fed had voted to keep the rates unchanged for now. Though the US central bank is expected to increase borrowing costs in December, that decision will likely depend on the outcome of the presidential election on November 8. The presidential race between Democratic candidate Hillary Clinton and Republican Donald Trump has rattled financial markets.

Usually, stocks rise before an election but this time, the presidential election has managed to disrupt the usual pattern in the equity markets. US stocks are falling due to the uncertainty over the result.

The trend in employment growth has slowed as the labour market nears full employment and the economy’s recovery from the 2007-09 recession shows signs of aging.

Nevertheless, there has been an increase in average monthly earnings, which grew by 0.3% in October from its previous position of 0.2% in September.

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IFM Correspondent

November 3, 2016: The Federal Reserve on November 2 hinted at hiking interest rates in December. For now, officials voted to keep rates unchanged following a meeting in Washington. They emphasised that the pace of rate hikes will depend on evolution of the economy.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the Federal Reserve stated.

Volatility in the financial market due to uncertainty surrounding the result of US presidential election is the reason behind the Reserve’s decision not to hike interest rates immediately. US stocks and the dollar have taken a hit because of this very reason.

The US economy continues to grow in terms of employment as well as overall economic growth. Inflation finally appears to be picking up, although it remains below the Fed’s target of 2%. The Fed stated that it will need more evidence to substantiate that employment and inflation are on track according to the central bank’s goals before proposing a hike in interest rates.

The performance of the economy is creating confidence that it will be able to withstand increase in interest rates. The Fed plans to raise interest rates gradually.

A majority of investors expect the Federal Reserve to hike interest rates in the near future.

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IFM Correspondent

November 3, 2016: US stocks fell to the lowest since July amidst the uncertainty surrounding the presidential election after one poll suggested Donald Trump could win.

The latest ABC/Washington Post poll shows US presidential candidates Hillary Clinton and Donald Trump are neck-and-neck, with Donald Trump leading by just one point. The share price declines sent leading equity indices to their lowest level since Britain’s exit from the European Union.

Stocks pared losses after falling steeply in early afternoon trading as the S&P 500 breached a key technical level. The Dow Jones Industrial Average slipped 105.32 points, or 0.6 percent, to 18,037.10. The Nasdaq Composite Index dropped 0.7 percent, and the CBOE Volatility Index surged 8.8 percent to the highest since June 28.

The presidential race between Democratic candidate Hillary Clinton and Republican candidate Donald Trump has appeared to tighten in the past week following news that the FBI is investigating more emails as part of a probe into Clinton’s use of a private email system.

Investors anticipate turmoil in the market in the final stretch leading up to one of the most controversial elections in US history. There appears to be a general consensus among analysts that a Clinton win is likely to be good for the dollar as opposed to a Trump win. But anxiety and uncertainty is on the rise because, according to the latest polls, Hillary Clinton no longer appears to be in the lead. The market had accounted for Clinton winning but appears unprepared for Trump.

There are no major movements but as many investors are anxious about the outcome of the elections, there has been minor selling.

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IFM Correspondent

October 24, 2016: Only a few weeks is left before the US chooses its 45th president. Historically, every US president elected till date has faced a recession or a recession-like scenario. A Wall Street Journal survey in June of more than 60 economists shows that the odds of a recession within the next 12 months are about 21%, a rise of two percentage points higher than the poll taken in April.

“If the next president is not going to have a recession, it will be a US record,” said Gad Levanon, chief economist for North America at the Conference Board in New York. In the United States, the unofficial beginning and ending dates of national economic expansions have been defined by National Bureau of Economic Research (NEBR), a private non-profit research organisation. The NBER defines expansion as a period when economic activity rises substantially, spreads across the economy, and typically lasts for several years.

It might be recalled that when President Barack Obama took office in January 2009, the nation was in midst of the Lehman crisis. When George W Bush started his tenure in 2001, he inherited a recession-like scenario.

The current economic expansion, which is 83-month-old, is already the fourth-longest in more than 150 years. According to studies, it is showing signs of wearing off. In fact, the history of cyclical expansion suggests that the odds are significantly better than 50-50 that the US will have a recession within the next three years. US’s real GDP growth is on a downward trend over the last four quarters, according to the US Bureau of Economic Analysis (BEA).

A lot will also depend on how Brexit unfolds. An unstable EU will affect US in more than one way. Exports, which have been a major contributor in the nation’s post 2008 economic recovery, has suffered in the past few years, thanks to slower growth in Europe. Brexit will only exacerbate this. Historically, the UK has acted as the main channel for US to express its political and economic will in Europe. With the UK out of the European Union, the US will find it harder to influence Europe.

Hence, many are of the belief that the US is overdue for a recession even if Clinton comes to power. According to a report in Yahoo, findings by Tax Foundation show that a Clinton presidency would reduce GDP by 1% over the long-term and cause a 0.7 percent drop in after-tax income for the top 10% of taxpayers.

However, Tom Elliott, deVere Group’s International Investment Strategist, does not foresee much change if Clinton wins. “Assuming Clinton wins, I don’t expect much change from current growth rates (between 1 and 1.5%). She will be under pressure to be ‘tough’ on foreign trade, so Pacific and European trade deals look vulnerable. But the positive effect of completing these is only long term.”

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