Flanders commented that ‘radical uncertainty’ will likely be the theme of the year ahead, with uncertainty around the impact of Donald Trump’s ‘drive by tweeting’ on global markets and individual companies, and the ongoing saga of the UK’s Brexit negotiations.
The eminent economist takes the view that the uncertainty around the UK’s exit from Brexit has the capacity to breed just as much uncertainty for investors as does the election of Trump.
She is sceptical of the ability of Trump’s much vaunted stimulus plans to help the US economy over the medium term, remarking that any economic stimulus instigated by Trump at this time is ‘the first time in history anywhere that an economic stimulus is happening that wasn’t preceded by recession.’
She added that Trump’s stimulus measures appear to be of the kind that boost short-term growth, when the US economy appears not to need such a boost, at the expense of long-term growth through investing in infrastructure like education.
Flanders takes the view that the economic uncertainty engendered by the EU Referendum result is likely to still the hand of the Bank of England when it comes to UK interest rates.
The traditional response of the central bank to rising inflation and a falling currency is to put interest rates up. But that is perhaps only effective as a remedy when the inflation is the result of strong economic growth, rather than a falling currency.
With that in mind Flanders takes the view that US interest rates will continue to rise, but a UK rate rise remains some way in the future.
Read more: Why Mark Carney might ‘have to’ raise UK interest rates in 2017
That is because the inflation we are seeing in the US is the consequence of higher economic growth, something that the policies of Donald Trump may boost in the short-term.
But the inflation in the UK is the result of the falling currency, and should be expected to dent economic growth in the near term.
Flanders remedy for equity investors is to treat them both the same way. She said, ‘A big problem is going to be that the uncertainties will impact different companies in different ways, and that implies active fund managers should do better. I come from a profession, economics, which is not always sympathetic to active fund management, but in these circumstances I think the active managers are better placed.’
She continued, ‘I take the view that the larger companies, particularly in the UK, are better placed to deal with volatility, which ones do best will be about where they source materials from.’
Flanders added, ‘The rise in bond yields is likely to help the banks. Obviously economic growth as we are seeing in the US helps the US banks. In terms of the UK, the more globally-focused banks have the capacity to grow.’