The bitter taste of de-globalisation

By Cássio Valdujo, V3

Market insights | February 2017

More Trump, some Le Pen and the bitter taste of de-globalisation.

If culinary TV shows have taught us anything, it is the importance of balance between flavours; that ingredients should complement one another and make a dish unique, not fight to see which spice will overpower the rest. Go heavy on salt or garlic and, at best, you are in for a lot of fake compliments on your cooking abilities, at worst a Gordon Ramsay style put down.

February’s dish has been served and things are far from rosy. In Ramsay’s words: ‘you used so much salt I had a stroke just looking at the plate’. Trump was (yet again) the source of discord and the centre of attention in February (we believe he will remain so throughout the year) with the now infamous “Muslim ban” - a policy that acted as a preview for the new foreign and trade policy that the government wants to implement. Although heavily criticised by the industrial sector and also by Silicon Valley (both heavily reliant on foreign workers), it was only reversed once a US court blocked its implementation, though by then it had already damaged the image of the country as welcoming ‘your tired, your poor, your huddled masses yearning to breathe free.’ More salt on Trump’s opposition’s wounds.

Unfortunately, too much ‘salt’ was not the only worrisome news in February. ‘You’ve used so much garlic HBO had to cancel True Blood’ bellows Ramsay! France was the metaphorical ‘garlic’, hitting the news, as their presidential election nears with two out of three main candidates under investigation for misuse of public funds: far-right nationalist Marine Le Pen and conservative François Fillon. Although their infractions were similar on many levels, Le Pen not only managed to keep the lead in the polls, but also to gain more traction as she positioned herself as being targeted by EU politicians, while Fillon is poised not only to lose the first round of voting, but risks being replaced before the election even takes place. That alone should be enough to scare investors about the strength of the nationalist movement in Europe and the consequences of an upset victory à la Trump in the already troubled European political scene.

I cannot print what Mr Ramsay said next, but I can tell you that whilst we were all distracted with Trump and France, there have been a number of issues heating up, with the potential to reach burning point. The U.K. and Brexit were in the news again, as Prime Minister Theresa May hinted at a hard-Brexit negotiation - spooking many in the City of London and painting a bleak picture for the future of the financial services industry in the country. Elsewhere, the North Koreans are targeting regime opposition abroad with nerve agent (VX) and launching long-range missiles at the sea, in spite of UN resolutions. This has lead the South Koreans to speed up the deployment of a new U.S. defence missile system on their border, which in turn made the Chinese furious at South Korea (and at the Americans, obviously). That triggered what one could define as ‘trade war 2.0,’ with Korean companies being targeted by Chinese-sponsored cyber-attacks, local tourism companies cancelling South Korean tours and stores selling South Korean products in mainland China being vandalised.

Despite the negative news, it was a month of gains across the board in the markets

  • Developed market equities rewarded investors with gains in major markets, thereby building on the momentum of the previous months. U.S. equities kept believers of the Trump rally celebrating for another month, as the S&P500 ended the month up 3.72% despite the strong dollar. European equities recovered from last month’s losses and supported by the weaker Euro climbed 2.75%, and Japanese equities gained 0.41%, as the economy kept above its potential growth rate and corporate results were better than previously expected.
  • Fixed income markets had another positive month, as European bonds (both sovereign and corporate) recovered part of the losses of the previous month as a result of the re-evaluation of the political risk in Europe, (despite increased volatility in French bonds related to the presidential elections in April). U.S. Treasury bonds gained 0.49% as investors focused on the “too much talk and no action” pro-growth Trump agenda and reassessed their expectations. Investment grade bonds gained 1.33% and U.S. high yield bonds gained 1.48% as investors continued to search for higher yielding securities and showed no signs of abandoning the asset class, even after more than a year of strong gains.
  • Emerging market equities had another strong month (up 1.74%) despite the strong losses in Russia, while emerging market bonds added to the strong momentum seen since 2016, gaining 1.84% in February.
  • Oil gained 2.27% in the month, more than recovering the losses of January, as the commodity seems to have found its place balanced delicately between USD 50 and USD 55 a barrel. Prices have been supported by the high compliance level of OPEC members to the production cuts agreed late last year so far. However, this prices could abruptly drop should there be a stronger than expected production volume in the U.S. or from a free rider country looking to take advantage of higher prices to sell increased production.
  • Gold had another month of gains (up 3.11%) as investors kept buying the yellow metal as a result of the still increased level of uncertainties around the world.

Global markets in numbers


Source: Bloomberg

Market Outlook

Going back to our dish, let us evaluate whether it is in some way edible, or a bitter, burnt disaster.

The numbers do not lie and if you ignore the headlines and focus only on the performance so far, 2017 is shaping up not to taste too bad and to be a continuation of the risk-on market rally of 2016, but investors should be aware that the odds are against that. The main reasons for this include the already discussed political crisis in Europe (with the rise of the protectionist nationalist movement in countries ranging from France to the Netherlands); the resurgence of the Greek debt crisis (which in all fairness should have never disappeared from the news); the shaping of the Trump presidency and all the political noise resulting from it and finally the next steps in the monetary policy in the U.S. and around the world. There are far too many uncertainties to let investors sleep at night without a plan B, or at least some kind of strategy for an alternative scenario.

As previously mentioned, quite apart from the U.S. and the Trump administration, there are equally troubling outcomes starting to shape elsewhere and Europe is home to most of them today. Markets are already moving with the increased risk that the Euro’s future is in jeopardy due to the growth of Le Pen’s candidacy and the prospect of a not-so-sure loss in the run-off election against either independent Macron or conservative Fillon. To have an idea of what can happen if the Euro is no more, look no further than Russia, where despite the better economic growth figures and higher oil prices during the month, markets went down (contrary to most emerging markets) as investors started to price the risk of an Euro breakup in the country’s foreign currency reserves, 40% allocated in the common currency.

The Greek debt crisis - a tragedy waiting to happen - should be another source of preoccupation for investors, as 2017 brings several payment deadlines that the country surely cannot meet on its own. For politicians and parties hoping for re-election, the political price of agreeing to direct more European funds to Greece in a year with major elections all over the continent has never been so high, and nationalist movements are doing all they can to capitalise on this sensitive topic. The IMF participation in this new rescue is not guaranteed, since the fund and its European peers seems to disagree on the level of austerity required to grant new funds to the Hellenic republic.

Bon appétit!

For more information, please contact our Chief Investment Officer, Cássio H. Valdujo, on:

+41 22 715 0910

Cover image:

Gordon Ramsay quotes are taken from and

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