BLOG: How two political events might influence markets in 2016

0
Written by: Paul Brain and Simon Cox
22/12/2015
With the recent Spanish general election and the third year anniversary of Japan’s Abenomics, BNY Mellon's Paul Brain and Simon Cox comment on how these political events might influence markets in 2016.

Spain’s messy political situation – Paul Brain, lead manager of the Newton Global Dynamic Bond Fund, Newton Investment Management

“For a while now we have seen a fragmentation of the political system in Europe. The longer the period of unemployment, the greater the chance of seeing fringe parties gaining electoral votes. At this point there is no clear party in Spain that has got a majority and there is no clear collection of parties that could form a coalition. In the past you might have had more centralist parties, now you have more extreme anti-austerity and anti-corruption far left and far right parties coming through, which makes it harder to form a coalition given their different ideological beliefs.”

“We have been underweight in Spanish bonds in our portfolios but we have a target level which we want to get back to. The reason we want to invest there in the long term is because of the continued support from the ECB’s bond buying programme, which should put the spread lower.”

“Investors should take a step back and look at the gradual economic improvement that has been going on in Spain over the past 18 months. The underlying strength of the economy is still good and there are opportunities on both the equity and bond side, and a lack of leadership should not de-rail this momentum.”

Japan’s productivity paradox – Simon Cox, investment strategist, Asia Pacific, BNY Mellon Investment Management

“In September, Japan’s prime minister, Shinzo Abe, announced a bold target to increase Japan’s nominal GDP by about 20 per cent. It was one of three new “arrows” of Abenomics, his campaign to revive Japan’s economy, complementing the original arrows of monetary stimulus, fiscal pragmatism and structural reform. To achieve this growth, Japan will have to defeat deflation, prevent the workforce shrinking too fast, and increase labour productivity (GDP per worker) by roughly 2 per cent a year.

“Because Japan’s productivity level is so low, it also has ample scope to grow. Japan could increase its GDP by 20 per cent merely by replicating the productivity performance of the European Union’s older members (i.e., the 15 countries in the EU before the May 2004 enlargement). A lack of competitive “push” in Japan’s economy may, however, be less important than a shortage of demand “pull”. Japanese firms can get away with hoarding workers in unproductive jobs partly because those workers have few better options. Japanese unemployment may be low, according to the official statistics, but underemployment, as abundant anecdotal evidence attests, is rife, especially in Japan’s service sector.

“If Japanese spending picked up, activity quickened, and hiring strengthened further, these workers might find more interesting and lucrative things to do with their time. Japan’s firms would then adapt to life without them—perhaps by employing the same labour-saving technologies that other countries embraced long ago.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Flight cancelled or delayed? Your rights explained

With no sign of the problems in UK aviation easing over the peak summer period, many will worry whether holida...

Rail strikes: Your travel and refund rights

Thousands of railway workers will strike across three days this week, grinding much of the transport system to...

How your monthly bills could rise as the base rate reaches 1.25%

The Bank of England has raised the base rate to 1.25% as predicted – the fifth consecutive rise in just six ...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week