The Rearview Mirror: December 2017

USA: Tax Reform

The 2017 is almost over and with the end of the year approaching fast, here comes a period usually characterized by lower volumes. We are also getting better evidence on some specific themes, on which we were called to make a reasonable prognostication only 12 months earlier.

The Tax Reform for instance should be signed up by President D. Trump before Christmas in its best-case scenario. Jerome Powell will substitute Janet Yellen as the next FED Chairman. Both the OPEC and Russia are willing to curb the OIL output production just to mention some of the latest headlines on topics that will determine the upcoming market evolution.

Last year, most analysts were bullish with regard to their expectations on equity markets. Nonetheless equity valuations raised even more than expected in most of the cases. Meanwhile, it was not so controversial the idea to see higher yields, especially on the US Treasury Curve. Speculators and investors were betting on a level of 3% on the 10yr, a stronger Dollar compared to its peers and lately a steeper yield curve. However, none of these predictions have materialized. With a very unusual low volatility the yield curve continued to flatten, postponing the urge of several hikes, despite a well sustained economic growth but lacking in inflation data.

We are called to specify a view, as if we could really see the world through a crystal ball.

During this time of the year I could hear following comment: since market experts and professional investors receive a salary also to provide us with a consistent view about the future behaviour of the market, they are called to make a prediction.

It is a self-sustained game and the solid proof of its consequence is the never-ending process of adjusting estimates of future target prices for singles stocks by equity analysts. They took into account the latest of a very positive earnings seasons. They are discounting future earnings by modelling low rates. In some way, they also take into consideration the flow process and the enormous amount of liquidity in circulation. But at this very time of the year, apparently, they never fully accounted for a Tax Reform effects, mainly due to of the level of uncertainty, and this until this Saturday morning.

So, what to expect from now on?
One should expect higher equity valuations for the upcoming year, despite some uncertainty about US midterm election and about the FED response to the fiscal new measures.

I would also expect more volatility to come, both on the equity and on the bond market. We have always declared, that part of the world economic growth was due to a weaker dollar, able to spur emerging economies. Now that the Federal Reserve could change its narrative, even if J. Powell is seen as a perfect continuation of the soft economic policy implemented by Yellen, things could change, if not dramatically, at least could derail the new normal theory.

 Christian Zorico: LinkedIn Profile

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Christian Zorico
Ha conseguito il Master of Quantitative Finance and Risk Management (MAFINRISK) presso l’Università Bocconi nel 2005 dopo essersi laureato in Economia degli Intermediari Finanziari presso la stessa Università. Inizialmente ha svolto attività di ricerca e tutoring per i corsi di Portfolio management e Applied Econometrics presso l’Università Bocconi tenuti dal Professor Andrea Beltratti. In seguito ha avuto modo di consolidare le nozioni tecniche ed applicarle sul campo durante l’esperienza come quantitative analyst e risk manager in un Hedge Fund con strategia macro e successivamente ricoprendo la posizione di gestore di portafoglio e fund manager con mandato flessibile per una banca privata svizzera e un gestore di fondi. L’area di interesse è da sempre il mondo fixed-income e azionario, inseriti nel più ampio approccio di analisi top-down.