Political interference will continue to negatively impact markets for some time, writes Tom Walker, manager of the Martin Currie Global Portfolio Trust.
“Politics is the art of postponing decisions until they are no longer relevant,” said three-time French prime minister Henri Queuille.
American economist Milton Friedman expressed a similar sentiment, albeit less charitably: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
There is no doubt that politics – or, more accurately, the economic uncertainties being generated by politics – are causing increasing anxiety among investors and corporate decision-makers. At the time of writing, Europe’s markets have received a boost, largely from promises of action by political leaders.
Ignore the political noise
This is best illustrated by the recent decline in bond yields in countries like Spain and Italy, but also by the coinciding sharp bounce in European equity markets over the last three months (Italy up 14%, Spain up 20% and Greece up 35%). But it is hard to see any greater resolution to address austerity, or any real improvement in the economic outlook of countries like Spain and Greece.
Meanwhile, we know President Obama has won a second term, but many questions remain unanswered, not least of which: can he work with Congress to reduce the deficit and avoid recession in so doing? The president must also negotiate the shifting sands of the US economy.
On the positive side, third-quarter GDP growth in the US accelerated to 2% from 1.3% in the previous quarter, having been flattered by strong federal spending – the positive aspect of political intervention. Meanwhile, consumer confidence is back up to five-year-high levels and the housing market appears to have moved meaningfully off the bottom – housing starts in September rose to 872,000, up an impressive 15%.
To put this into perspective, however, this figure equates to the worst level of housing starts seen at the trough of the 1981 and 1990 recessions. And a recent loan officers’ survey confirmed that while banks are more willing to lend, demand is sluggish. The manufacturing and services sectors’ purchasing managers’ surveys are still above 50, however, signifying growth.
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