Welcome to another edition of Alion Partners Capital LLP’s “Wrapping the Week”, the place where we (a bunch of serious market guys) write our views about what has been going in the markets during the past week. Our commentaries and analysis are like no others’ – we take a humorous approach whilst trying to make you think about serious matters- Our aim is to be informative, analytic, precise, thoughtful, yet light and entertaining for a Friday afternoon.
And hello and happy new year to everyone.
11 days in and we’ve had quite the rally already with many names up significantly from the December lows. I expect this volatility to continue into the foreseeable future – great news for good traders although for everyone else it’s time to buckle up again!
This week’s wrap will take a slightly different approach. I’ll sketch out a few thoughts as to how the year could pan out both in markets and politics.
Let’s start with Brexit
With less than three months to go to exit day the never-ending farce continues. First, what I think is very unlikely is a second referendum. Such a prospect would be exceptionally damaging to the UK. It could fuel the far-right and totally undermine British democracy. Leave voters would probably abstain, making it illegitimate, and if they didn’t, there would be a highly significant chance that Leave would win again, this time, by a bigger margin. So, I think everyone knows that’s a non-starter. There could be an extension of article 50 and also a general election but it’s very unlikely that Brexit doesn’t happen. I predict that It will also be the biggest non-event of the year.
Trump will be gone by the end of the year either through his own incompetence (see the ongoing border wall fiasco) or, more likely, via the findings of Robert Mueller which will reveal some pretty scandalous operations before and during the election. The Republicans will (and have already) turned on him as he becomes an electoral liability. Luckily for them, the Democrats will continue to struggle to galvanize huge support without some fresh blood. Indeed, US Politics will turn on the older generation of both parties. However, keep an eye on AOC – she’s very savvy and the Republicans are very scared of her judging by how much they attack her.
These will get worse. We are in the early stages of the battle for the 21st Century and beyond. Forget the isolationist rhetoric from Trump. America will not give up its predominant position lightly. While there may be a calming down of the trade war this will only be on the surface. China’s rise is being checked. Their reaction will be key. The recently pushed story about an invasion of Taiwan is one to keep an eye on. In the end, Xi is dictator for life and we’ve never had such a global player, so big and influential as a dictatorship which influences so much from politics to support the stock market with so few internal checks on its power. Perhaps finally the China bubble bursts helped by some aggressive US foreign policy.
Already things are taking a turn lower. GDP is being revised lower, over 20% of all apartments in China are empty and commodities are going nowhere. There is nothing left to build. China is now in a middle-income trap. It’s difficult to see how it gets out of it – especially with such a planned and inflexible economic and political system that has no mechanism to admit or fix mistakes. Also, expect to see a lot less hype about the One Belt One Road policy which is now looking like a failure. Commodity stocks and metals will continue to decline (as will Sydney house prices) as the world realizes there is no real need to build any anywhere near the same rate. Australia will go into recession for the first time in decades. China will attempt to stimulate the economy and market again, but it really doesn’t have the firepower anymore – not a friendly West to help it as in previous times. Watch out for distractions such as the Taiwan issue mentioned earlier and more clamping down on dissent. The issues with Chinese tech companies being frozen out of Western telecoms infrastructure will continue to have a positive effect on Nokia, Ericsson and the like.
These will continue to come down as more and more realize how only a few will be able to sustainably make money in the future. Facebook will continue to decline as more people leave the social network and move elsewhere. Both Google and Facebook also will face huge pressure from governments investigating their business practices and privacy policies. One stock in that space I expect to outperform is Twitter.
The world is now in an uncertain time. The engines of global growth are fading and the stimulus that has been taken for granted is now coming off. Governments and central banks have reached a limit. Mathematically and politically it is now very difficult to become more interventionist, especially when markets remain fairly high in the United States. Expect a rough ride these next few months and a correction to become a global recession. Sell the rips and do not buy the dips – not yet anyway. In the meantime happy trading.
Normal service resumes next week (with all your favourite charts and twitter grabs!)
Have a great weekend!
The Alion team.
Important notice: Copyright Alion Partners Capital LLP 2018. Not for reproduction or retransmissions without written consent from Alion Partners Capital LLP. This is a Market Analysis and Commentary and not an official research report and the views expressed in this document are those of the author(s). The author(s) are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Past performance may not be indicative of future results. Alion Partners Capital LLP is authorised and regulated by the Financial Conduct Authority with number 540688.