POLITICAL NEWS - Politics dominated the global market agenda last week, with the US midterm election front and centre. For once, things went more or less according to script. President Donald Trump’s Republican Party retained the Senate (the upper house of the Congress), but ceded control of the House of Representatives to the Democrats.
This is a recipe for political gridlock, but it seems to suit most investors as it is likely to rule out major unsettling policy changes until the 2020 elections.
Global markets continue to recover from the October slump and jumped following the election. Unfortunately, the JSE’s November rally has lost steam, largely due to fresh declines in the Naspers share price, in turn due to Tencent falling in the Hong Kong market.
But the local market is still positive in the month, which, given how terrible this year has been, says something.
Global equity indices in local currencies, rebased to 100
Source: Thomson Reuters Datastream.
Interestingly, the US market has historically performed strongly in the year following the midterm election. The Wall Street Journal reports that the S&P 500 has delivered positive returns in the 12 months after the midterms every time since 1946, regardless of which party performed better, with an average return of 15%. It is not exactly clear why this is the case though, but if enough investors believe this time will be no different, then it won’t. In general, however, it is better to focus on the underlying economic reality – which is still healthy – and stick to a long-term strategy rather than trying to follow patterns.
Rates and trade
With the midterm polls out of the way, attention is likely to return to other policy issues, namely US-China trade tensions and interest rates. On the latter score, the US Federal Reserve kept rates unchanged at its monetary policy meeting last week. This was as expected – but a hike in December is still likely, given the Fed’s assessment that the US labour market has “continued to strengthen and that economic activity has been rising at a strong rate”. Importantly though, actual and expected measures of inflation remain stable at around 2%, suggesting no need to accelerate rate hikes.
President Trump has of course complained bitterly about the Fed’s interest rate hikes, going as far as calling them “crazy”. This is highly unlikely to dissuade the Fed, whose independence is fiercely guarded. It is not the only central bank facing pressure from the government of the day though. The perceived lack of independence of the Turkish and Argentinian central banks was a key reason why these countries saw their currencies slump earlier this year. Turkish government bond yields, which traded at the same yield as South Africa’s two years ago, are now almost twice as high.
More recently, the governor of the Reserve Bank of India (RBI) has clashed with the Indian prime minster over how much autonomy the RBI should have.
The other big uncertainty remains China-US trade relations. Ironically, Trump’s hard-line views on trade with China have always been closer to the Democrats than to his own party. It is an open question whether the election outcome will change how he approaches the trade war he launched. Despite the imposition of a range of tariffs on Chinese goods, America’s trade deficit with China has actually increased. In September it was $37 billion, the largest monthly deficit on record excluding March 2015 when trade was impacted by a strike at key US ports.
