The year is coming to an end, and it’s time for a quick review. One thing is certain: we are likely to remember 2016 for a long time. It was an investment year with many economic and political surprises. Surprises whose consequences are likely to remain with us for a long time to come, says, Philipp Vorndran, Capital Market Strategist at Flossbach von Storch.
For simplicity’s sake, let us look at the year chronologically. Do you still recall the beginning of the year, when many investors were worried that China’s economy might collapse and with it the (next) market crash? Reflecting the dependency of the German export industry on China, the DAX index temporarily fell more than 20 per cent. Equity prices fell even more significantly in some emerging markets. In addition, some emerging market currencies fell substantially – at least temporarily.
We are no longer talking about these events at the end of the year. The DAX index has recovered for the most part. In other places, the USA for example, equity indices have even reached new highs. China’s problems, however, have not disappeared overnight. Its industrial sector is slowing, its government is bloated and its banks face a growing mountain of bad loans. These problems still exist, and we are likely to have to deal with them again in the future.
The perspective of investors, however, has changed during the course of the year. Their attention has shifted to other events. Last summer, it was Brexit. I will not say that we fully expected the outcome of the UK referendum. We did not. But we were also not taken by surprise. We had continually stated that it would be a close call. Populism is again on the rise, we wrote. Worldwide. And not just since the summer.
“Think the unthinkable” has been our motto for the past few years, and the events of 2016 have further reinforced it. It would be delusional to believe that the world would stay the same or that structural breaks would not occur. One has to remain realistic. We stated that the economic effects of a Brexit would be manageable. For the fact is no one would cease trading with the UK, just because the British people had voted to leave the EU. Nothing has changed to this assessment since then. The political consequences of a Brexit are likely to be more serious over the long term. Other countries might follow the lead of the UK. The EU has, in any case, been damaged. It needs to make the case as to why it is still desirable to be a part of the Union. Will it succeed in this?
Populism experienced a revival in November when Donald Trump was elected the 45th President of the United States. If anyone had said five years ago that this real estate mogul and reality TV star could actually become the most powerful politician in the world, they probably would have been ridiculed. But behold: Donald Trump will be the next US president.
True to our motto “think the unthinkable,” we held a meeting the day before the election. We discussed what might happen and what we could or should do. A Trump win, we thought, would create certain opportunities from an investor’s perspective, as prices could fall considerably. We therefore used limit orders to position ourselves in the market. The fall in equity prices was, however, only short-term in nature and limited to the markets in Asia.
After Trump gave a speech that was very conciliatory by his standards, markets moved significantly into positive territory. Within half an hour, Trump went from being seen by investors as “chaotic” to being the “Messiah”. Many investors believed his vague promises of creating millions of new jobs and making massive investments in US infrastructure and bought shares of companies that would benefit from an economic upswing. Indices climbed. How the Trump government plans to pay for these measures still remains to be seen.
Populism is not just a phenomenon in the Anglo-American world - even if this is what much of Germany’s mainstream media would like to make its audiences believe. The growing loss of confidence in political institutions – as well as in the media and in central banks – also applies to Europe. “You up there, we down here” is the election motto of many voters who feel frustrated and left behind amid globalization. There is a great desire among them for simple answers. But: being against something is easy when you don’t know what you’re for.
Populism in Europe is likely to be the focus in 2017. There are the March elections in the Netherlands, where right-wing populist Geert Wilders is advocating an exit from the Eurozone. Then there is the French presidential election in May, where Marine Le Pen of the Front National (FN) party may have a good chance of winning. I recently had the opportunity to talk with Manuel Valls, the Prime Minister of France. When I asked him about Le Pen, he said he could not rule out the possibility of her actually winning. And he also would not rule out the possibility of France leaving the Eurozone in the not-too-distant future, if Europe failed to make the case for the importance of a single currency. Who would have thought this possible five years ago?
Meanwhile in Germany far-right and far-left political parties are gaining ground with simple slogans and easy answers. The elections to the Bundestag, or German Parliament, will be held in September. Populism is likely to occupy us a great deal in the coming months. We hope the established parties carefully examine their shortcomings and find more answers to voter concerns. You don’t have to be a prophet to foresee that this will not be an easy task.