As the saying goes: when the US sneezes, the rest of the world catches a cold. But that does not mean that the rest of the world doesn’t already have problems and opportunities of its own in a global context where the geopolitical situation affects markets more than ever before. For Leon Cornelissen, Chief Economist at Robeco, elections in Europe, Chinese development, and the debt super-cycle the market is currently undergoing, mark his vision for the coming years.
The biggest surprise of the New Year was not the fact that Trump’s behavior turned out to be as erratic as he displayed during the election campaign, but that the market rose in response to expectations of new fiscal measures and better corporate profits. However, for Cornelissen, Trump is not the only risk which the US represents, the high debt of US companies is also another one. Despite the risks, the firm is betting on the dollar in the long term, as, according to Cornelissen, "it will remain strong as a result of the political situation Europe faces."
But he warns that any forecast will depend on the gradual development of policies made by the new tenant of the White House. "As long as his decisions do not directly impact or undermine underlying growth and profits, the stock market will ignore him" says Robeco's Chief Economist, who believes that it is logical to think that, until we arrive at that scenario, economic growth and profits will continue to rise. Despite this reasoning, Robeco is cautious and maintains a neutral view on high-yield bonds and is underweight in sovereign debt.
The Old Continent
For Cornelissen, Europe is not doing so bad. In fact, its growth in 2016 surpassed that of the United States by 0.1%. Although, as a consequence, inflationary pressures have increased, Robeco explains. This is due in part to political pressures within the Euro zone and also to the fact that the ECB remains reluctant to open the debate on raising interest rates.
The political landscape will capture the most attention in 2017. The French presidential elections have been affected because the center-right candidate will probably be forced to withdraw due to allegations of corruption. The fact that in Italy the former Prime Minister is pushing for new elections, and that Greece is increasingly under pressure by the lack of agreement between the IMF and Germany to activate the third Greek bailout, completes the scenario.
Within this horizon there are other upcoming elections to take into account. "The elections in the Netherlands, Germany, and probably in Italy, are also worrisome to the markets, especially in the Italian case where growth prospects are not so good, which affects its risk premium," said Cornelissen. Also, the economist has drawn attention to the consequences of the Brexit, which, in his opinion, will end up damaging the British economy. "In short, Europe is more important to the United Kingdom than the United Kingdom is to Europe," he said in terms of the British trade balance.
According to Cornelissen, amidst this European context, Spain can benefit. "Investors are choosing the Spanish bond against the Italian or the French," he said, referring to the good prospects for the country given that the growth of its GDP is the highest. "The stability achieved in Spain and the situation in France are two aspects that favor it," he points out.
The weight of debt
Another key factor for Cornelissen is the level of global debt, which reached record highs in absolute terms and in relation to GDP. "Increasing debt is not a problem as long as there is growth, but it will be counterproductive if growth starts to fall. Keep in mind that, while the value of assets may fluctuate, debt is fixed, " he says.
In this regard, for him, it is clear that debt has many positive aspects, "for example, it fuels growth or business investment," but warns in this respect of some future problem areas such as China, US companies and loans to public administrations.
As regards to (o regarding, no se puede as regards) possible investment opportunities, Cornelissen points to emerging economies. Among them are the Latin American countries that, in his opinion, "are doing well compared to the last five years and remain attractive." He is optimistic about the options in these markets, but warns that, in the short term, they will also suffer the effect of the policies implemented by President Donald Trump, which in particular will affect countries like Brazil or Mexico.