Pictet: Upbeat growth, simmering risks

In January, financial markets accentuated the positives of President Donald Trumps’ proposals to fire up the US economy with fiscal stimulus. Investors bought equities, cut exposure to government bonds and sold the US dollar. At the same time, they ignored the risks Trump’s administration might pose to world trade and instead focused on the prospects of a return to synchronised global growth.

Emerging market (EM) stocks saw the strongest gains, ending the month higher by some 6 per cent in US dollar terms; Latin American markets were the best performing by some distance.1 In the US, both the S and P 500 and the Dow Jones Industrial Average indices hit record highs as investors were enthused by Trump’s plans to boost infrastructure spending and cut corporate tax rates. According to the OECD, the proposed US fiscal package could amount to the biggest spending splurge outside recession, adding some 1.2 percentage points to US growth in 2018. Euro zone stocks also ended higher as the region’s economic growth remained buoyant and the European Central Bank sounded a dovish note.

Amid the rally, cyclical and financial stocks outpaced defensive shares on the whole, reinforcing a trend that has been in place for some months (see chart). Materials and information technology stocks were the bestperforming sectors in global indices while utilities and energy suffered.

In pricing in the prospect of a pick-up in the pace of global growth, investors scaled back their holdings of government bonds. Euro zone, Japanese, Swiss and UK government bonds ended the month in negative territory. US government debt was flat. Emerging market local currency and US dollar debt were bright spots, however, both ending up on the month by more than 1 per cent.

The prospect of a further rise in interest rates lay behind a spike in bond issuance among sovereign and corporate borrowers worldwide. Keen to lock in cheap borrowing costs before the Fed tightens monetary policy later this year, companies and government agencies issued over USD600 billion of new debt in January, almost a fifth more than they sold in the same month last year.

In the currency markets, the US dollar fell against many G-10 and EM currencies after Trump suggested his administration may not adhere to the ‘strong dollar’ policy the country has hitherto pursued. At the same time, investors found themselves overexposed to the dollar following the currency's strong rally in the autumn. The euro, Japanese yen, Australian dollar, Brazilian real and Russian rouble each saw gains of more than 1 per cent against the greenback.

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