How do we even start to sum up 2016 on in one blog? Great tomes will surely be written about a year in which so many orthodoxies were overturned and paradigms shifted. But we’re going to give it our best shot by picking what we think are five standout moments– i.e. those we think best epitomise a tumultuous year in capital markets. Or not all that tumultuous, considering….
In our first blog of 2016 we wrote that: “… rising levels of uncertainty in the geopolitical, economic and natural environment have left us questioning what is truly unthinkable….”
Quite. Although, I think we did ok in our ten predictions: fluid, partisan, scrutinised, disrupted, crude, tempered, divergent, sensitive, tighter, busy….
But, if we are to sum up 2016 in one word, perhaps it is “unthinkable”. As I begin this blog, it’s feeling “ indescribable”, but here’s our best shot in five moments in no particular order….apart from the first one, which undoubtedly sets the agenda for almost everything else.
- The anti-establishment votes
The debate continues as to what electorates actually voted for in 2016. I’m not sure it’s easy to separate or weight the feelings of those described to be economically and culturally left behind. The dynamics are complex and implications still rather nebulous.What we can say is that this trend could have far reaching consequences in politics, economic and markets – some of which we identify below, but we’re still really speculating. Inequality and fiscal spending have been pushed up the political agenda with an immediate impact on market sentiment, although actual policy responses are still hazy. We know there is probably little we can take for granted in trade or foreign policy – especially with regard to BREXIT and the new US administration. All of which makes 2017 arguably even more uncertain than 2016, which is a curious context for what follows.
- The ‘grand slam’
In November, we reported on a grand slam in US equity markets, with all four major indices hitting record highs. The logic is sound. Increased US fiscal spending should increase growth and inflation. Growth was already in the narrative for 2017, but Donald Trump’s victory and pro-stimulus rhetoric solidified and provided impetus– enough to totally flip market dynamics and send funds flowing from bonds into equities.What has been surprising has been the certainty with which the logic has been applied. But that’s been the story of 2016 in US and Europe markets – fearless. Nothing bad sticks for long. To be fair, resilience is also the story of 2016 – but we can’t get away from the fact that 2017 has more than the usual known unknowns. Are investors inured to ambiguous outlooks? Does liquidity encourage them to see upside on the basis that something will turn up? The flipside of this is a chase for returns that has perhaps kept investors markets beyond their usual risk appetites. Is reality distorted? In the UK the FTSE 100 looks much less healthy in dollar terms.
This all might explain the lack of enthusiasm for IPOs even in these buoyant equity markets. Not confidence so much as herd behaviour. Either way, if markets are priced very firmly for an outcome that is by no means certain – and that feels precarious to me.
- AT&T ‘s bid for Time Warner
Think back to Q1, when we had uncertainty about growth and China. Or Q2, when faced with BREXIT. Or Q3 and the upcoming US election and now Q4 will all these trends culminating in one of the most uncertain outlooks I can remember since the financial crisis. And yet, 2016 looks like being the third or fourth highest year for M&A ever by value.It did seems that nothing, but nothing could stop the M&A train in 2016. We could have picked any number of deals to represent the year. Lanxess’ acquisition of Chemtura epitomised the race for growth in mature sectors. We’ve seen significant purchases from China and Japan. But this deal is just so 2016 – a year that’s seen even more transformational mega deals; increasing cross-sector deals to meet consumer demand for seamless service; and once again affirmed the importance of content.
As Randall Stephenson, AT&T chairman and CEO said:
“This is a perfect match of two companies with complementary strengths who can bring a fresh approach to how the media and communications industry works for customers, content creators, distributors and advertisers.”
In this fast moving, slow growth world in which companies fear being left behind, it seems that it will take much more than mere uncertainty to halt the need and desire for deals.
- The second Fed rate rise this decade
The Fed’s move this week is a culmination of other trends building across the year that signal the end of ultra-cheap debt. Not a dramatic end, but arguably any move upwards after so long at so low could feel pretty dramatic.The Fed made a point of saying its interest rate rise wasn’t Trump related – his plans are just plans after all. The jump in US interest rate expectations suggest that Trump’s plans are in there somewhere, but it is true that market dynamics were changing before the election. We don’t want to overplay the impact of inflation– deflationary forces remain – but it’s certainly back on the agenda in advanced economies, albeit with different drivers. The rise in oil price provides a common foundation, but obviously the UK has currency element, the US a fiscal one.Beyond this, all central banks also seem to be weighing costs and benefits of monetary policy more closely – with encouragement from governments’ rediscovery of fiscal stimulus in the light of recent political trends.
The Bank of England has said in 2017 it could go either way. The ECB is scaling back its QE programme. And in debt markets – as discussed above – money is starting to move out, tightening markets for borrowers. US three-month Libor is now at 0.99%, the highest since 2009. Barclays A+ index has moved from 2% to close to 3% in the last six months. All of this has also made it a rocky year* in currency markets and a rockier end for emerging markets – both trends that we take into 2017.
*By rocky, I mean volatile but by no means entirely adverse. Sterling’s dramatic drop raises the prospect of a spike in inflation in 2016, but its value arguably better reflects the reality of the UK’s trade position. And it really looks like the year of the dollar in 2017 – more on which in the New Year.
- OPEC’s production cut The oil price has been a dominant force in 2016 one way or another. In January, at US$36 a barrel, investors had fundamental sector concerns that spilled out into the markets. At the end of the year, at around US$55 we have oil price feeding into the inflation story. In between we have a will they, won’t they OPEC story that finally culminates in the first production cut in eight years – but also question marks over implementation and non-OPEC supply that highlights geopolitical and sector complexities that deepened in 2016.Overall, it doesn’t look like prices will move outside of a US$40-60 band in 2016 given the supply that can come on stream. That’s not enough to be a game changer for companies struggling – especially down the supply chain, since capex won’t rise significantly to help those reliant on it.
Pressures down the supply chain were a constant theme in 2016 across many sectors – and again I don’t see much changing into 2017.
So that’s the five. Of course there is so much more to 2016, from rising and devastating geopolitical tensions to the inexorable rise of social media and states of outrage. Companies are under more scrutiny than ever – facts less so. A world turned upside down? Perhaps we’ll see experts and facts return to favour in 2017 if uncertainty persists? It does feel like a year whose significance could change with hindsight and most of all what happens next in 2017…a subject we’ll take a run at in the New Year.
In the meantime, we hope you enjoy the holidays and please share any thoughts you have on this year and next.