These are confusing times in markets with some very polarised views so, suggests Guy Stephens, investors should stay put and wait for a 'black swan' event to deploy fresh capital
There are currently four big political stories rumbling on - dominating the newswires and causing currency fluctuations as the egotistical posturing lurches one way or the other.
In terms of importance for investors, we see the respective order of these as - Trump's influence, Brexit negotiations, the French election and the UK election. The first two are the most uncertain and unpredictable for markets, while the last two appear to be a relatively benign evolution, if not a foregone conclusion.
Of particular note recently was Trump's acceptance he had to back down in order to get his budget bill through Congress and avoid a government shutdown. In fact, in his first 100 days, he has achieved very little and has failed to implement any of his pre-presidential pledges.
Last week we saw him having to back down on his healthcare plan, which would remove healthcare payments to those who would otherwise not be able to afford health cover under Obamacare. A second reversal saw him backing down on the initial $1bn (£770m) budgetary funding requirement for his Mexican wall.
Congress had him over a barrel on this one as, if he had stood his ground, the alternative would have been the humiliation of a government shutdown when his party - assuming he really is a Republican - holds both houses. Clearly, this would have been a disastrous crowning glory for his first 100 days.
This is a key development, because it shows where the real power lies - and Trump now understands this. For all his blustering about "the art of the deal" and "draining the swamp" of Washington, he is encountering an immovable opposition that is inevitably making him look weak.
In many ways, this confirms the markets' sanguine attitude towards some of his most controversial pre-election policy statements and demonstrates why investors were eager to price in the positive and ignore the negative. For Trump, however, the pressure is now on to deliver some economic benefit, as weak first-quarter GDP figures last month, albeit seasonally expected, showed talk alone is not going to deliver any of his promised changes.
He may have won the hearts and minds of a sufficient proportion of the electorate against a widely distrusted Democratic candidate, but he now needs to win the hearts and minds of his own party in order to make any substantive progress. He has learnt the hard way that, with a slim majority, he cannot bully his way to Congressional support. Perhaps this is why he feels the need for a few supportive post-electoral rallies to bolster his ego and try to garner momentum.
Onto Brexit. This weekend, the papers were all reporting the apparent Downing Street dinner conflict between EU president Jean-Claude Juncker and UK prime minister Theresa May, a story that has been subsequently denied by Number 10. This initially caused sterling to weaken a little, which - perversely - strengthened the FTSE 100, as has been the case ever since the outcome of the Brexit vote.
Whatever the truth is behind this opening gambit, we have now seen the EU is set to play hardball from the offset, despite all the conciliatory noises of warmth since the vote. It is also clear, however, that Theresa May is not going to be a pushover either - although this could be part of her electoral positioning right now.
To win the election, she needs to be seen as a tough operator in relation to the opposing candidates and she has certainly exposed the need for a strong negotiator since starting at Number 10. She is also unlikely to soften her position when seeking a stronger majority via the UK election for exactly this reason. It will suit her campaign the EU negotiations will require an iron will - especially with any Brexit agreement now appearing a distant prospect.
The French election is moving in a market-friendly way with the polls suggesting Emmanuel Macron will take more than 60% of the second round vote, with most of those who missed out in the first-round supporting him rather than Le Pen. This is removing one of the key risks in Europe and unifies the status quo for now. It will be interesting to see how the EU evolves, if at all, now the populist revolution appears to have been snuffed out.
Our Brexit journey, where we do not even possess the single currency, is going to be long and arduous enough - so just imagine the process for extracting a euro member coupled with a new currency. It really does look like the unravelling of the euro is a very unlikely prospect as the downsides really are too numerous.
Finally, the UK election is increasingly looking like a non-event. As mentioned above, May is setting herself up as ‘the best chance we have' at negotiating effectively with the EU. The rumours of the weekend dinner spat will have done her no harm and serves to expose the very reasons why we have reached this point. Where the EU 27 are united, we are opposed and this relates to some strongly felt issues such as immigration, interference and cost.
Having an experienced politician at the helm over the next two years should resonate with most voters as being vitally important, regardless of political policy and view. We would not expect a surprise outcome and most likely a significantly increased majority, with ‘success' for the Tories probably judged to be a majority in excess of 100.
Weaker economic growth
Last week also saw weaker economic growth from the UK economy with consumers starting to react to a tighter discretionary spending environment as inflation starts to come through to the high street. The actual inflation numbers for March were flat at 2.3% but this was distorted for various reasons and so it is highly likely the April report in two weeks' time will deliver a media headline and an inference it is something to worry about.
We should perhaps brace ourselves for that, although the Bank of England's Monetary Policy Committee is likely to deliver a sanguine counter argument that this is entirely down to the devaluation of sterling and we should look through it as a one-off effect that will drop out of the numbers in due course.
While that is all entirely logical, investors tend to be far more sensitive to upside inflation than downside as the former requires belief and trust while the latter is a benign bonus.
These are confusing times in markets with some very polarised views, not helped by equities remaining the most attractive asset class by some margin. The opportunity cost of being an equity bear is very expensive, because it delivers either a zero or even negative return if and when interest rates rise. Such an investor has to be very bearish indeed to accept the alternatives available, in the belief equities will be even worse.
While valuations are expensive on some measures, global earnings are expanding with last year's perceived risks for 2017 falling away as we progress. Best to stay put for now, while hoping some sort of black swan event may provide some volatility and an opportunity to deploy fresh capital. The problem is, everyone is looking for that, which suggests we may have to wait for the rest of the year and beyond.
Guy Stephens is technical investment director at Rowan Dartington
'Can help iron out rough edges'
How do mergers affect investors?
Our video series continues
Three advisers have their say…
Regulator's data bulletin