ALL eyes are on President Donald Trump’s economic reform agenda which had kept US markets sizzling in anticipation since he was elected.
Besides other factors involving geopolitics, terrorism and Trump’s remarks on race, his disbanding of two business councils staffed by CEOs is seen as having a potentially negative impact on markets.
“CEOs’ exodus from the White House is bad news for corporate America,’’ said The Guardian.
“It is hard, though, to think that a breakdown in relations between corporate America and the president can be good news for the wider stock market.
“Sooner or later, the damage to confidence will affect real business decisions, and the process may now be starting,’’ said The Guardian.
The business councils have not met since April; now, their dissolution has given rise to concerns whether the Trump administration is able to deliver its reform agenda.
“The failure in delivering economic reform will likely dampen the US economy, and impact the global economy as well as that of emerging markets,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
“Worries about Trump’s ability to deliver will affect markets,’’ said Pong Teng Siew, head of research, InterPacific Securities.
“Despite the growing trade influence of China in recent years, the US remains a major trading partner for many Asian economies.
“The US stock market still leads in global investment sentiment and sets the investment outlook for large US-denominated institutional funds,’’ said Thomas Yong, CEO, Fortress Capital.
The dissolution of the business councils is seen as a setback to the reform agenda, added Yong.
Among the recent resignations over Trump’s remarks on race, in the wake of riots in Charlottesville, were Intel CEO Brian Krzanich, Under Armour’s Kevin Plank and Merck ’s Kenneth Frazier.
Earlier, Elon Musk of Tesla and Walt Disney CEO Bob Iger had quit after Trump’s decision to withdraw from the Paris climate accord. Former Uber CEO Travis Kalanick had also quit following Trump’s executive order on immigration.
Shortly after he became president, Trump had created two CEO advisory groups on strategy and policy, and manufacturing.
Ominous sign
In the midst of the current concerns, a Bank of America survey of money managers has revealed an “ominous sign” for US stocks. Only 33% of managers in the bank’s latest survey say corporate profits will improve, compared with 58% at the beginning of the year.
The drop represents a “warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones,” chief investment strategist Michael Hartnett was quoted in a note. “Further deterioration is likely to cause risk-off trades.”
A record 46% said equity markets are overvalued, added Bloomberg.
Global growth
There may be potentially negative factors but world economic growth, paced by rebounds in Japan and Europe, is set for faster, firmer growth that is expected to provide the foundation for next year.
Global gross domestic product is projected to increase by 3.4% in 2017 and 3.5% in 2018, according to the median forecast of economists surveyed by Bloomberg. This compares with a growth of 3.1% last year.
The expansion is broad-based and the gains look sustainable as they are not generating much in the way of inflation, or other excesses that frequently presage a downturn, said Bloomberg, quoting economists.
JPMorgan Chase has raised its forecast for US growth in the third quarter to an annualised 2.25% from 1.75%, noted Bloomberg. US growth had risen 2.6% in the second quarter.
In China, economists forecast growth of 6.7% this year while the International Monetary Fund has increased its estimate for the average annual growth rate through 2020, to 6.4% from 6%.
“When the big economies grow, emerging markets will benefit and this will translate into better earnings,’’ said Danny Wong, CEO, Areca Capital.
“Broadening global growth, supported by manufacturing, exports and investments as well as firming commodity prices, will provide the initial conditions to sustain the expansion.
“The sustainability of the global economic recovery will depend on appropriate policy steps by advanced and emerging economies to bolster the strength of their economies.
“The withdrawal of monetary support, including the tapering of bond purchase programmes, must be paced with the strength of the recovery.
“China’s crackdown on shadow banking and high debt must be effected gently to avoid over-adjustment,’’ said Lee.
Inorganic growth
“There is a strong sense that growth in the developed countries is not the result of organic growth or growth that can be realised without aggressive intervention such as in the form of free money or interest-free loans.
“Bond purchase programmes can only last as long as there are sovereign bonds available for purchase,’’ said Pong.
There may not be much sovereign bonds available before central banks own them all, other than those locked up by banks, insurance and pension funds.
“Beyond that, we need to question the quality and usefulness of signals from the massively distorted financial markets that we normally rely on, for policy making and forecasting.
“It is possible that we will sleepwalk into a recession,’’ said Pong.
Columnist Yap Leng Kuen looks forward to genuine growth.
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