We all carried two prominent worry wrinkles on our foreheads through much of winter – Demonetization and Trumpflation. Reassuringly, the former is already starting to fade away, while the latter is looking like a muddling issue that persists, but one that does not end up as damaging. We wait to see if markets think Trump’s 28 Feb economic plan is indeed “phenomenal”.
Another potential worry wrinkle in the making is French elections (April-May). The candidate leading opinion polls in round one is Marie Le Pen, who in her manifesto wants to remove the country from EU and reintroduce the Franc. This would entail an immediate re-pricing of local assets & liabilities in line with a weaker Franc (most likely).
This is still a low probability event since Emmanuel Marcon a proEU former economy minister is expected to do well in round 2. However, no one would take a chance on opinion polls after Trump and Brexit. So, businesses that were seeking to shift base following Brexit will probably wait till a Frexit risk is out of the way.
With the stage set for German elections (Sept-Oct) to be fought on immigration policy, brooding markets could become a feature through much of the year. This has the potential to throw a spanner in investment decisions globally for a while.
At home, bond markets have reacted like we have hit the end of the rate cut cycle and the next move is a rate hike (albeit after a long pause). We disagree, the commodity up cycle could pause if real global growth is moderate (due to uncertainty) and the price run-up so far attracts new supply. This means spillover to inflation would be capped.
Meanwhile, stock markets are concerned about the next source of growth if policy makers (RBI and the government) are unwilling to stimulate. Reform measures that help with monetary transmission, like adjusting small savings rate, can help in stoking demand.
India
NRI
