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Political Correctness will not Stop the Markets
“A pervasive public view that capitalism is broken and government regulation is the fix… this will not stall the new bull, but it may rein it in a little.”
In its final Stock Market Outlook for 2003, Fisher Investments Inc. (“Fisher”) predicts positive stock returns continuing into 2004, believing that monetary conditions, fiscal policy and reduced geopolitical risk aversion will work to further strengthen capital markets in the New Year.
Fisher has identified a number of positive indicators for the first quarter of 2004:
• Monetary conditions: short and long rates are not high enough to impede growth, and yield rates are steep – bullish for stock markets and economies;
• Fiscal Policy: the Bush tax cuts should provide stimulus for the US economy; Germany and France are correct to break the EMU rules and allow their deficits to run above the 3% of GDP cap;
• Geopolitically stimulated risk aversion: the capture of Saddam Hussein produced only a temporary rally illustrating that markets are becoming accustomed to geopolitical events. Major escalations across the Gulf region now seem unlikely, as is US military intervention in North Korea or Iran: global markets should not therefore plummet through risk aversion.
However, Fisher is concerned that three years of bear markets, political correctness and US Government interference are in danger of damaging the ‘new bull’ and the opportunities presented by the global economy. All levels of US Government are currently controlled by one party, which happens to be pro-regulation, and which, in an election year, may be tempted to repeat short-term vote winning, anti-free trade interventions.
The Company believes that this bearish influence is compounded by a perception that capitalism is in some way damaged and needs controlling. It cites the removal of New York Stock Exchange CEO, Richard Grasso, failed steel tariffs, the desire to weaken the dollar, and the drive for ‘outsiders’ to be appointed as controlling directors of corporations as examples of this damaging trend.
Andrew Teufel, Director of Research, Fisher Investments Inc. said, “Governments attempting to curry favour with an electorate by tinkering with the free market can and will damage growth, and, if it’s the US government, the global economy is affected. In the last bear market there was not one major financial bankruptcy, a testament to how well, not how badly capitalism is working without such interference. Stock markets have powered through bearish interventionist impediments, but so long as the politicians and certain elements in society believe that capitalism needs fixing, there is the danger that they may hamstring the bull.”
Over the medium term, Fisher believes that the European Union expansion - scheduled for May 2004 - can create economic pressures similar to those faced by East and West Germans following re-unification, across the entire EU. The Company highlights three areas of potential economic pressure:
• Within the new EMU economies, the Euro will be hoarded and a nation’s own weaker currency will circulate more freely until driven out. This will cause severe monetary hardship for existing EMU countries as they subsidise poorer new members, in an attempt to bring them up to their own economic standards
• Western Europe has a long and strong history of property rights compared with Eastern Europe. Fusing the two will cause economic dislocation
• Yield rates in the acceding countries must converge with the Euro. This is likely to impact in one to three years. The danger is that ECU’s monetary policy could exaggerate inflationary pressures in countries like Poland and Hungary, effectively skewing integration and increasing the negative economic impact of expansion.
Andrew Teufel said: “It should not be assumed that the long-term economic benefits of EU expansion will emerge quickly. Expanding the population by 25% and increasing the GDP by just 6% will be painful differentials to merge and we will be monitoring the potential effect on equities very closely.”
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