Next Wednesday, 8 November, will mark the first anniversary of Donald Trump winning the 2017 American presidential election. Despite all the opprobrium Trump continues to attract, it’s been a wonderful year for many – but not all – investors in the world’s biggest economy.
After the indictment this week of two senior campaign aides, as the FBI investigates allegations of Russian interference in that vote, serious uncertainty hangs over Trump’s tenure in the White House. But it can be said with certainty that the Dow Jones benchmark of American blue chips has risen by an eye-stretching 30% since Trump won.
Few presidents’ first year in office have seen a bigger rise in equity valuations, at home and overseas. Better still, having failed to build a wall with Mexico or bar Muslims from entering America, Trump’s dwindling team is now focused on delivering the tax cuts he promised, causing market anticipation of repatriated profits and special dividend distributions to propel the Dow to record highs.
Less happily, most investment trusts specialising in the United States have failed to match the increase in that country’s blue chip index during the last year. While the Association of Investment Companies’ North America sector shows an average share price total return of just over 14%, that disappointing figure is boosted by outperformance from across another border – where Canadian General Investments (CGI) delivered an outstanding 32%.
Among true US blue-chip trusts, North American Income (NAIT) – managed by Aberdeen Standard Investments – did best with a total return of nearly 16% and an attractive yield of 3%. JPMorgan American (JAM) managed 11% while BlackRock North American (BRNA) was left in the dust, delivering total returns of just 6%. Ouch. So much for home teams’ advantage in the world’s biggest stock market.
In the short term, which may not matter much to serious investors, explanations for unsatisfactory returns include excessive pessimism this time last year about the incoming president’s impact on markets and too cautious an approach to asset allocation in what looked like expensive equity valuations back then – which subsequently became even more expensive.
There is a valuable lesson here for investors everywhere who fret about bubbles bursting. While a bull market continues to climb a wall of fear, it pays to hang on for the ride. Everyone knows there are risks in stock market investment but fewer remember there are also risks in being out of the market.
Even today’s widely-anticipated increase in base rate by the Bank of England, which would be the first in a decade, will do little to preserve the real value or purchasing power of bank and building society savers’ capital. The alternative to the uncertainty inherent in equities remains the certainty of getting poorer slowly.
From a purely selfish point of view, I am delighted to report that my only country-specific investment trust exposure to the USA did better than all its rivals, big or small, during the last year. JPMorgan US Smaller Companies (JUSC) delivered total returns of 25%. That’s more than double its most comparable rival, Jupiter US Smaller Companies (JUS), which managed less than 12% over the same period. More importantly, the JPMorgan trust also remains ahead over the last five years and decade.
The future for investors today remains highly uncertain, with the American market trading on a cyclically-adjusted price/earnings (CAPE) ratio of 29, compared to the global average of shares currently priced at 23 years’ corporate earnings. A great deal depends on whether Trump can continue to prove Teflon-coated for long enough to deliver the promised tax cuts that would boost earnings, dividends and prices.
But Brits shouldn’t be snooty about America’s precarious president or its febrile politics. Brexit blues have depressed the UK market to trade on a CAPE ratio of just 15.7, according to calculations by Star Capital. That’s less than the 16.5 average for emerging markets today and, sooner or later, might suggest where real long-term value lies.
Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.