Why Investors Should Be Cautious amid Positive Economic Change

Geopolitical instability and global markets

Gorman expects the US economy to grow at 3% in 2017. He is uncertain about global growth primarily due to the geopolitical risk in the global markets. The US is the largest market with an output of about $17 trillion–$18 trillion. The policies of the new administration will be crucial in setting the next phase of economic change and growth globally. Let’s look at the global participants driving the market and their risks.

Why Investors Should Be Cautious amid Positive Economic Change

Resurgence of nationalist ideology and its impact

According to Gorman, the current prices should incorporate the geopolitical risk along with the positives of the policies of the new administration. Some equity markets are recovering and gaining strength, but some are still down. As the above chart shows, the Japanese, German, and French markets gained less than 2% in 2016. In the UK, the emergence of the new populist ideology of nationalism with the Brexit has affected its market performance and that of the EU (VLKAY) (DDAIF) (NSRGY) (MT). The European counterparts still haven’t been so affected by geopolitical crisis due to the central bank’s quantitative easing support.

The US (SPY) has performed better with gains of about 10% with the improving economy. The US has driven global growth in 2016. Europe hasn’t been impressive, as seen in the chart above, mainly due to the possibility of a recession. These markets could perform better as the geopolitical situation improves.

The Russia-Ukraine conflict and various battles in the Middle East continue to hamper global sentiment. But the ETFs of oil-rich nations gained momentum due to the jump in crude prices. As you can see in the chart, Russia and Latin America gained more than 30% in 2016. Brazil and Russia (RBL) showed slow growth in 2016 and is still contracting, but they seem to be on the track of improvement.

Meanwhile, China has been the worst performer, as the economy is under pressure due to high debt and a slowdown in domestic demand. The SPDR S&P China (GXC) was down by 2% in 2016.

Gorman states that global markets are on the path to recovery, but that recovery might not be a straight line. Let’s look at his perspective with China in the next article.