December has been welcomed with frost; nothing makes it feel like the festive season quite like woolly hats, gloves and an abundance of ginger bread. As I’ve explored the markets this week I’ve found that it wasn’t short of news. This weekend sees one of the largest geo-political events for markets this year, the Italian referendum. Yet the focus of UK newspapers is instead on the US and UK growth expectations, and this week’s news has made me question: regardless of the expectations, is there always room for growth?
US growth
The newspapers are full of doom and gloom as we approach the end of 2016. Most newspapers paint the president-elect as a nail in the coffin for the US economy, but it seems that the economic indicators are saying quite the opposite.
US quarter on quarter GDP growth came in ahead of expectations, it was 3.2% instead of the 3% expected. Coupled with this, consumer confidence is at its highest level since 2007 (the hedonistic days before the financial crisis gave us all a rather nasty wake-up call).
This largely backwards looking data supports the idea of an interest rate hike in the US, this has been well-touted among market participants. It also shows the strength of the US economy before any of the fiscal stimulus Trump has promised comes into effect. This should be positive for any investors exposed to US equity; in fact, small companies could benefit from a domestic focus more than larger ones. It will be interesting to see how long this can last and how markets respond, or if they’ve already priced this in.
UK growth
Many expected slower growth post the vote for Brexit, but yet another data point has been released with evidence to the contrary. The UK construction purchasing managers’ report for November was released today showing stronger than expected demand in construction.
Growth seems to be more robust than many market participants thought, this data also shows that inflation is coming through. We could interpret this as a proof point that the UK is able to cope in a post-Brexit environment, but it is still too soon to tell. Despite having the referendum result, nothing has happened yet. This data could give sterling a much needed boost in the global currency markets.
Italian referendum
This weekend people from across Italy will take to the polls to vote in the constitutional referendum. They’ll be choosing whether to accept or reject the proposed reforms from the current government. The reforms would reduce a lot of bureaucracy in the Italian political system, but many in Italy are viewing this referendum as a vote for or against the current Prime Minister, Matteo Renzi.
Tensions have been running high in the week running up to the referendum. Polls suggested that the ‘no’ vote is likely to win, but in reality it’s too close to call. Investors have recently shown little confidence in Italian debt, in light of the uncertainty. In the event of a ‘yes’ markets are like to rally, but a ‘no’ vote could mean that volatility returns to the financial markets.
Growth has come this year, in environments where we least expect it. Whilst past performance should never be used as an indicator of future returns, the current position of many economies with low inflation and low growth, implies that there is room for growth. If you have any questions about any of the topics discussed here please get in touch, this column only works if it helps you.
