The Market’s focus is shifting overseas. Globalization has been under assault. Post World War II norms are being questioned and re-thought on a daily basis. The movement for Brexit is picking up speed. Secretary of State Rex Tillerson has been in Asia all week, with a visit to China today. The G20 leaders have their first meeting of the year in Germany. German Chancellor Angela Merkel was at the White House today, meeting President Trump for the first time. This is a very complicated time on Planet Earth. But isn’t it always? That’s a rhetorical question…
British Prime Minister Theresa May is preparing to trigger Brexit by month’s end. That’s less than 2 weeks from now. The British Parliament passed legislation allowing the government to invoke Article 50 of the Lisbon Treaty which would begin the 2 year process to formally leave the European Union. The negotiations are not expected to be smooth nor friendly. Complicating things further, now Scotland is re-thinking their stance in both the EU as well as the UK. This is all coming 9 months after the Brexit vote was cast last Summer.
The majority of Britons feel the European Union is too bureaucratic, out of touch, ineffective, expensive and an obstacle to secure borders. Prime Minister May intends to formally pull the United Kingdom out of the single European market, which it has been a part of for nearly 5 decades. That would be defined as a “hard” or “clean” Brexit. The British Prime Minister simply wants the best possible deal, but she’s not likely to get it. The EU needs to be careful not to set a dangerous precedent of giving the British the benefits of membership without sharing in the responsibilities. Others would follow suit.
Theresa May is trying to understand the rise of populism and act accordingly. This protectionist movement around the globe is happening for a reason. Rules matter and most people just want a fair opportunity. Our Founding Fathers had it right with the basic common goal of life, liberty and the pursuit of happiness. Unfortunately, increased nationalism tends to lead to extremism. It plays on fear. There’s a great deal of hate. It creates wars. People feel threatened. People are scared.
I had the opportunity to meet former Prime Minister David Cameron, who does not think this is the end of the European Union. It is clear that Britain never loved the details of the union. The Brits never embraced the central currency. He believes Britain ultimately will maintain trade relations and will collaborate on security. Cameron believes Brexit will lead to a stronger and safer European continent. He shares a common belief that the UK was simply paying too high a price for the economic benefits.
2017 is another big year for elections. Many European leaders are relieved that the Dutch election this week did not go to the anti-immigration and populist candidate. The protectionist theme that drove Brexit and our Presidential election had been gaining momentum throughout Europe. Does the Dutch election suggest a reversal? We shall see. France is holding its election in the coming weeks and Germany has their election in the Fall. The future of the European Union will, no doubt, hang in the balance.
With all of these issues around the globe, you might be surprised to know that International Markets have outperformed our Market. It’s been led by Emerging Markets, which have exploded higher, up 13% on the year. The British economy has accelerated since the Brexit vote, counter to most predictions. The underlying Credit Markets are functioning well. That doesn’t indicate any mounting global crisis. These are very economically sensitive regions which are accelerating, and that is Bullish. Importantly, Emerging Markets have effectively done nothing for 10 years. But they just had their best week in a year. The Emerging Market Index is at the same level that it was in April of 2007. It’s renewed strength should not be underestimated. While the DOW and S&P hover near their all-time highs, the rest of the world has plenty of catching up to do. This is very normal and very healthy.
Have a nice weekend. We’re all over it.