This week is a summary of the Dutch election results, interest rate decisions in the UK and US, confidence in Germany’s economy’s in Q1 2017 and a portfolio update.
POPULISM SUFFERS SETBACK
The ‘populist’ movement that set up Brexit and Trump was dealt a blow by the Dutch electorate on 15 March. However, although Rutte’s VVD party (People's Party for Freedom and Democracy) picked up 33 of the seats, he will have to invite multiple parties to form a collation to rule. This all takes time. Some are suggesting that in order to avoid having to battle Geert Wilders’s PVV 20-seat party at every turn, he’ll have to invite as many as four other political parties to join him. The last time five factions were involved in such negotiations was back in 1973 when the five-party cabinet took 151 days to form a government.
SPLIT INTEREST RATE VIEWS
The Bank of England decided to keep rates on hold at 0.25% at its meeting on 16 March. However, its Monetary Policy Committee voting was split for the first time since July 2016. One member voted to move rates to 0.5%, while a further eight stated that it would take "relatively little" to persuade them to push rates higher. While a rate rise would help curb the above target inflation, it should also boost confidence in the economy. However, others saw the recent softening of consumer spending figures as a reason to keep the rates on hold for now.
US RATES RISE
The Federal Reserve (Fed) came to a much-expected decision on 15 March to raise headline rates by 0.25% to a range of 0.75% to 1%. The debate is now on as to whether the Fed will move two more times in 2017 to raise rates, or whether that number could climb to as many as four. The decision did not upset markets – although given the 100% consensus probability going into the meeting, the move was very well anticipated – and since every recent economic indicator has come in as strong or stronger than expectations.
GERMANY POWERS ON
Germany’s Economy Ministry announced that it expects growth in Q1 2017 to outpace the 0.4% GDP growth in Q4 2016, helped by higher state spending on refugees, increased private consumption and higher investment in housing. Sentiment indicators also suggested a brighter economic outlook, with consumers and retailers remaining confident according to the ministry’s monthly paper. This contrasts with the consumer sentiment index published by the Nuremberg-based GfK institute, which saw three components – overall economic expectation, personal income expectation and propensity to buy – fall to 10 after three increases in a row. It may, however, tally with this week’s GfK update.
The tactical asset allocation process has now moved to the implementation phase. With the updated set of scenarios, the 7IM team has a view on how each of the major economies could play out in the coming three to 12 months, and what that means for assets.
One immediate portfolio action is to increase our gold allocation. While the team are confident about economic growth globally, it’s a safe haven against political risk. Europe, in particular, remains vulnerable ahead of the 23 April and 7 May French Presidential votes. 7IM’s investment is through two physically-backed exchange traded funds and which are managed by iShares and Source.
More on the implementation of the new tactical asset allocation will be published after the trades are completed in the next few weeks.
THREE ANNOUNCEMENTS DUE THIS WEEK
22 March – UK Inflation Rate // 23 March – US Existing Homes Sales // 23 March – Germany GfK Consumer Confidence
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SOURCES: NOS, BLOOMBERG, 7IM