While political uncertainty fell in the US and UK in 2016, it is Continental Europe’s turn in 2017. France, Germany and the Netherlands have national elections scheduled, while Italy and possibly Greece may hold snap elections also. With populist parties polling strongly, many fear anti-EU forces are on the rise, poised to grab national power and take their respective countries out of the eurozone. However, this overlooks European politics’ factionalized, scattered nature—the parliamentary system, common in Europe, leads to many parties and platforms. The result: parties with minority support forge fragile coalitions and muddy the legislature’s ability to act. This gridlock is an overlooked positive that reduces legislative risks for stocks. Similar to the US after November, once investors realize their political fears are overstated, they can start appreciating other market drivers, like the eurozone’s steady economic growth—setting up a bullish upside surprise.
Global stocks were flat in January while eurozone stocks fell -1.0%. Political developments in France and the Netherlands grabbed headlines, with their elections soon approaching. As the first round of France’s presidential election nears, recent polls triggered fear as the far-right, anti-EU Front National’s Marine Le Pen led. However, this seems like a quirk of France’s election system, as the first round splits votes among many parties. If Le Pen fails to win greater than 50% of the first-round vote, a second, head-to-head round will follow. Polls suggest a more than 20-point edge for her principal opponents, independent centrist Emmanuel Macron and center-right François Fillon—the latter despite a scandal that threatens his candidacy.
In the Netherlands’ March parliamentary elections, the Party for Freedom—a far-right, anti-EU party led by Geert Wilders—leads polls. However, they are expected to win only 33 of parliament’s 150 seats, and other parties have indicated they aren’t willing to partner with Wilders. The likely result is gridlock—no negative for a Dutch economy that doesn’t need reforms.
The eurozone’s underappreciated growth streak continues. The preliminary Q4 2016 estimate reported GDP grew 0.5% q/q (2.0% annualized), the 15th straight positive quarter. More recent data are positive as well. Markit’s January flash composite purchasing managers’ index (PMI) hit 54.3, just below December’s 54.4. Both Services (53.6) and Manufacturing (55.1) flash PMIs were also above 50, suggesting a majority of surveyed firms expanded. Composite PMIs for two of the eurozone’s biggest economies—Germany and France—were also above 50. Looking ahead, eurozone growth looks likely to continue, as money is moving around the monetary union. Broad money supply (M3) grew 4.8% y/y in December, just a touch off November’s 4.9%, while loan growth accelerated, with non-financial corporate and household lending rising 2.0% y/y and 2.2% y/y, respectively. Also, The Conference Board’s Leading Economic Index (LEI) rose a robust 0.7% m/m in December, led by a pickup in the yield spread—another sign of loan profitability. As uncertainty falls this year, investors should start recognizing the eurozone’s underappreciated growth, a bullish surprise.
Brexit uncertainty continued falling in January. Prime Minister Theresa May outlined her government’s exit plans, announcing the UK wouldn’t seek access to the EU’s single market and would pursue a new trade agreement with the bloc instead. Since May chose a “hard Brexit” instead of a “soft Brexit,” many worry the unknown path could be more economically damaging. However, the fears seem to be over semantics. If the UK and EU agreed to a new free trade agreement that was essentially single market access (or better) except in name, it would be a positive for both parties.
Besides May’s speech, in January, the UK Supreme Court also ruled Parliament must vote before the PM can trigger Article 50, which would formally launch Brexit negotiations with the EU. However, this is unlikely to prevent Brexit. Anticipating an unfavorable ruling, the May administration had a bill ready for Parliament’s consideration mere days after the court’s decision. Moreover, many lawmakers don’t oppose the PM, as doing so would go against the will of the people: On February 1, 498 Members of Parliament (MPs) voted in support of the government’s bill while 114 voted against. And on February 28th, the House of Lords voted to give the Government the authority to trigger Article 50 and begin the process of leaving the EU, further reducing uncertainty. Brexit’s developments should continue playing out slowly and publicly, gradually reducing uncertainty and surprise potential.
January economic data put Brexit’s non-effect on full display, too. Q4 2016 GDP grew 0.6% q/q (2.4% annualised), beating expectations. Services—by far the biggest sector of the economy—rose 0.8%. Manufacturing grew as well, but falling mining output offset it, bringing heavy industry’s net contribution to zero. Though falling December retail sales volumes (-1.9% m/m, the second straight monthly decline) put a bit of a damper on the year’s end, this is a limited, volatile gauge. During the year, retail sales volumes were positive six months and negative six months on a monthly basis. That volatility didn’t derail the UK’s overall 2016 consumption-driven expansion.
In the US, President Donald Trump continues to dominate the headlines, causing many to underappreciate solid economic growth and stocks’ healthy rally. Fears over Trump’s executive orders, trade policy, and comments over Mexico, Germany and Australia ruled the airwaves, but it was almost all either pure talk or sociology—not market-related. The new administration did formally permit two oil pipeline projects to advance, but we don’t expect these to have a major macroeconomic or market impact.
Trump also pulled America out of the Trans-Pacific Partnership (TPP) free trade agreement, but we’ve expected the collapse of this deal for more than a year. Trump’s TPP withdrawal was more the coup de grâce than a new, surprising move. Moreover, the deal’s failure amounts more to the absence of a positive than a new negative. Rising fears over Trump’s protectionist rhetoric tees up potential positive surprise when he does less than expected on trade. Already, talk is emerging about potential bilateral or smaller multilateral deals arising from TPP’s ashes. And, while he could change course, it is interesting to note that Trump’s claim he would name China a currency manipulator “on day one” of his presidency has yet to materialize.
The focus on politics overlooks solid US economic growth entering 2017. The US Leading Economic Index (LEI) rose 0.6% m/m in January and Institute for Supply Management Manufacturing and Non-Manufacturing purchasing managers’ indexes were strong, extending a solid run. While Q4 GDP growth decelerated to 1.9% annualized from Q3’s 3.5%, much of the deceleration was from volatile trade. Net exports subtracted 1.7 percentage points, mostly due to a reversal of a Q3 surge in soybean exports. The less volatile, pure private sector components—household consumption, residential real estate investment and non-residential fixed investment—grew 2.4%, up from Q3’s 2.1%. With the yield curve positively sloped, banks are incentivized continue lending and businesses to investing.
Economic data also confirm Japanese growth remains tepid. Most data released in January don’t deviate from their trends. December inflation hovered around flattish, regardless of the gauge used: National CPI inched up 0.3% y/y, Core CPI (excluding fresh food) slipped -0.2%, and “Core-Core” CPI (excluding fresh food and energy) was flat. All show the BoJ’s much-ballyhooed efforts to stoke inflation have fallen short. Trade-wise, December export values rose 5.4% y/y—the first positive reading since September 2015—while imports contracted again at -2.6% y/y. However, on a volumes basis, which indicates the quantity of goods exchanged, trade fared better as exports rose 8.4% y/y and imports were up 3.6%. Yet domestic demand overall remains flagging as December personal consumption expenditures fell -0.3% y/y. Couple these weak data with the US’s pulling out of the TPP—which Prime Minister Shinzo Abe spent a good deal of political capital on—and sentiment toward Japan is plunging. While Japan’s near-term prospects don’t seem particularly bright, Japanese stock valuations have declined and foreign capital is leaving—signs investors have turned. Sentiment souring further could set up the potential for opportunities in the Land of the Rising Sun.
This update constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.
 Source: FactSet, as of 2/3/2017.
 Source: Eurostat, as of 1/31/2017.
 Source: Markit, as of 1/31/2017.
 Source: European Central Bank, as of 1/31/2017.
 Source: The Conference Board, as of 1/31/2017.
 Source: The Office for National Statistics, as of 1/31/2017.
 Source: Bureau of Economic Analysis, as of 1/31/2017.
 Source: FactSet, as of 1/31/2017.
 Source: Japan Customs, as of 1/31/2017.
 Ibid: FactSet, as of 1/31/2017.