Brexit, the US elections, and now the Italian vote
have reframed the investment scenario, setting new challenges
in an already hostile environment for yield starved investors.
Economist and author, George Magnus, discusses his outlook for
2017 with Giada Vercelli.
Giada Vercelli: Following an eventful 2016, what is the risk
backdrop that you envisage for 2017?
George Magnus: Ironically, the economic
backdrop for markets doesn't look so bad in 2017. The US is
ending the year on a high, china is stable and even the Euro
Area looks to be picking up. Yet, the political turbulence on
the world is if anything becoming more intense, and risky. So
far, markets have been more than resilient but investors will
need to pay close attention to political upset tensions and
possibilities and the consequences they might have. These span
such areas as US China relations, trade and currencies, and
GV: Are you more concerned about the implications of an
unpredictable Trump foreign policy, the South China Sea, or the
future of Europe?
GM: If Trump's foreign policy raised the
risk of overt conflict with China or Russia, rather than
heightened tensions, then all bets are off. Otherwise, I'd say
the biggest known unknown that would change the environment
beyond anyone's imagination would be something that triggered
GV: Is the Monetary Union history?
GM: I don't think it is, because the
political glue that makes it stick together is harder than we
think. At the same time I don't see it surviving as currently
constituted. Greece cannot surely survive in the Euro as a ward
of Europe as current policies are constituted. But the
existential threat lies in Italy or France or even Holland - if
and when people should ever be given the opportunity to elect
parties that were determined to leave.
GV: Where is the next bubble coming from?
GM: The next bubble may be a more
traditional inflation in goods and services, rather than in
asset prices. That could be good for gold for example, and
precious metals. But in the more conventional assets such as
property and bonds and commodities, I think the bubble story is
either tired or almost over. Equities interest me because they
seem impervious to unsettling news. Keep an eye on them because
if they keep rising against all the odds, this might be the
next asset beneficiary.
GV: With interest rates on the rise in the US and the
announced tapering of unorthodox measures by the ECB, is the
global economy stable enough to deal with a higher cost of
GM: To be fair, the only place where
interest rates look likely to rise is the US - and there the
economy is doing ok and the new government want to rev it up a
bit more. Rates aren't going up in Europe, or Japan or the UK
and so the higher cost of money worry looks a bit premature.
Though, of course, bond yields may end up higher.
GV: Are we beginning to toy with the idea of an
inflationary environment, given the expected fiscal dimension
of the Trump administration and the increased cost of living in
post Brexit UK?
GM: I definitely think there's a whiff of
inflation in the air for the reasons you mention. It may not be
uniform yet, but commodity and energy prices are up a decent
amount off their lows. A little bit of inflation would be one
of my main 'watch list' items as policy makers sideline
monetary policies and supplement with fiscal measures.
GV: The US economy is expected to grow by 2% in
2017, driven by a healthy consumer sector due to a consistent
decline in unemployment and a steady increase in wages. Can we
expect these trends to continue underpinning growth under the
GM: The US consumer has been doing ok,
sustained as you point out by steady gains in employment and
modest wage gains. The weak spot had been capital spending, and
if the government can get companies to pick up their capital
spending, that'll turn out to have been a major accomplishment.
In any event, the fiscal stimulus we are all guessing at right
now should lift growth in 2017, if not longer.
GV: Trump may have the firepower to expand fiscal
policy, but what is the trade-off for Trump to deliver
infrastructure spending and an overall fiscally aggressive plan
to the austerity preached by the traditional
GM: This is one of our known unknowns, namely
how fiscally conservative Republicans will behave. It's
possible they might try to moderate Trump's more aggressive
plans or tweak what they see as his excesses. On the other
hand, they may lack the guts or the organisation or will to
stand up to a president who has defied all the predictions,
including their own. In fact that's my suspicion.
GV: Less encouraging is the picture of weak levels
of industrial production and of weak capital expenditure, with
American corporates sitting on a volume of surplus liquidity
amounting to a record 3 trillion dollars. Apple alone is
sitting on 237 billion dollars. Is weak productivity still a
GM: Weak productivity is a problem viz
expectations of rising living standards and incomes. But at the
same time a lot of digital tech companies like Apple generate
more cash than they know what to do with capex-wise. That said,
the US and many other countries have a major corporate
governance problem in having allowed listed firms to build up
so much idle balance sheet cash. Governments need to reach a
pact with companies that unwinds excess cash holdings either in
favour of dividends or capex or wages or all three.
GV: The Trump administration is poised to introduce
tax breaks to make it advantageous for companies to bring cash
back to the US, as about a third of American corporates
liquidity is held offshore. What will be the consequences for
GM: Well of course it all depends how those
balances are held. If they are largely dollar balances, then
transferring these back into dollar accounts at home won't have
any impact on the currency. If they're held in euros or
Yen, though, then they'll be sold for dollars and push up the
value of the currency. I'd expect the overall effect to be
positive for the dollar, all things considered.
GV: America is the worlds biggest oil
producer, along with Saudi Arabia and Russia. Oil prices have
risen with the OPEC agreement to move forward on production
limits. Production is recovering in Libya, Nigeria and Iran,
all of which will likely be exempt from future agreements.
However, in the US, oil reserve data released pointed to higher
crude stockpiles than initially estimated, increasing fears of
a long-drawn supply glut. Have weaker hydrocarbon prices
GM: I think they've probably bottomed out
in view of an incremental rise in global aggregate demand that
seems to be taking shape, and ahead of the OPEC production
agreements scheduled for January 2017. But both might look much
more tenuous on a 2 tier view. So I'm a bit wary to be honest.
The surge in global growth in the 2000s is over, the China
miracle is over, and the openness in trade and investment that
fuelled global growth over the last 30 years is now under real
threat. If you twist my arm, I think hydrocarbon prices are on
a temporary roll, but will ease lower again by 2018-19.
GV: Is OPEC fighting against history, given the
irreversible impact on prices of the shale
GM: I'm not sure the shale revolution is
forever, but I'm not saying that from the standpoint of
expertise, just what I hear. My view though would be that the
combination of shale pro tem, and green and alternative energy
sources will eventually compromise the cartel's raisin
GV: What should the world economy find under the
Christmas tree for a better 2017?
GM: Under the Christmas tree? Only good
things lie under the tree. And if you look hard right now, I'd
say the world economy is looking up at the moment and that 2017
may see us cheer better economic growth - even as we
groan at political developments that may be harbingers of, not
least, a turn in the economy in due course.