Market Outlook – November 2016
We believe bonds are likely to be an enormous bubble. They peaked in June and the pain has just been getting worse. If you stay with these investments a while longer, you may suffer severely. The same applies for bond proxies, yield plays that have hit their highest valuations ever only to crumble since June. Many portfolios are loaded with this type of asset – good luck; we think you will need it.
The US Dollar has taken some hits this year over doubts on interest rate rises, and the Yen in particular has risen dramatically – over 20% at one point. The AUD has bounced from 68c and the Euro came off its lows. We believe that is all about to change and the USD is likely to embark on a seriously barnstorming run.
We think most stocks will go up, including the ASX, despite a lack of focus on profit growth and general company management – but a bull market rises all boats. Financials could go up a lot assuming negative interest rates are eliminated and inflation comes back steepening the yield curve.
A lot of people have asked us what we think. So here it is:
President Trump is likely to have a massively bullish effect for two reasons. Firstly, a policy of dramatic increases in infrastructure spending coupled with large tax cuts and tax reform will drive growth for many years in the USA and the rest of the world. Copper did not have its best week ever for no reason. Secondly, by luck or design, Trump has got his timing right.
The USA has been stagnating for decades so it will not take much of a spark – and Trump is promising a raging fire. The economy was poised for inflation anyway and we are about to find out how much fuel all of the QE from the last seven years counts for – possibly a great deal.
Inflation could increase significantly, reversing the 30+ year rally in bonds, particularly long dated ones. If that is true, many of the assets that have been chased to ridiculous prices will get crushed. Many people think that will include stocks, but we do not. The ASX is the same level it reached ten years, Europe is nearly twenty years on from their peaks and Japan – approximately forty years. Stocks have lagged significantly, but we think that will change dramatically and investors will be horribly placed – as usual. Even investors who have tackled stocks have favoured market neutral funds – and you do not want that sort of strategy in a bull market; you want to be long.
After Brexit and the Trump phenomenon, it is not hard to imagine that all the major leaders in Europe will be removed in elections over the next 12 and 24 months. This could not happen soon enough given the dead bureaucratic hand that seems to praise sclerosis and epic incompetence that has made the Eurozone so attractive to leave at all costs. We think that will change and the upside could be tremendous.
We believe that the macro environment has caused turbulent events like Brexit and Trump, rather than the events themselves causing the turbulence. However, these events have made market participants anticipate further activity is likely and the reduction in outliers and unlikely events is the very definition of how a trend forms. We believe that stocks outperform almost everything else from here – significantly. On this basis, we think the real returns will be made early and investors will adapt after that occurs – it started in June, so it is already possible to identify who has captured it, and who has not.