In our last piece we said there were reasons to remain optimistic on equity markets and indeed that view has certainly been borne out as the S&P 500 has reached a series of new highs.
At the moment, markets seems to be taking it as read that Donald Trump will deliver a boost to economic growth and also roll back some of the Obama administration’s high-profile legislation, most notably the Affordable Care Act, dubbed ‘Obamacare’ and the Dodd-Frank Act that was implemented in the aftermath of the financial crisis.
Globally, banks in particular have been benefiting from the prospect of lighter regulation (as well as support from higher bond yields) although by contrast healthcare and related areas have been unsettled by concerns that Trump could take quite a hard line on pricing. It used to be the case that Republican presidents were pharma friendly, but Trump has delighted in upsetting the form book.
Whatever your view of Trump, he is clearly trying to follow through with what he proposed in his campaign and this will create opportunities, as well as threats for asset allocators in the coming months. Given the strength of US markets recently, and ongoing interest in US dollar earners in light of the uncertainties in Europe, we think it will pay to be selective in the US while remaining cognisant of the fact that the growth dynamics are better than the rest of the world.
The outlook in the rest of world remains much more difficult to call. Historically, Asia and emerging market assets as a group have not performed well in a rising US interest rate and strong dollar environment, so when investing here investors should look at areas with valuation support or stock/company-specific catalysts.
As we mentioned in our last update, the picture in Europe is clouded by a very messy political calendar over the coming months and Brexit. However, we have recently turned more bullish on European equities as the politics has somewhat overshadowed the improving economic landscape.
Purchasing managers’ indices have been inflecting higher and the region appears to be experiencing a cyclical upturn. Like elsewhere, inflationary pressures have been building but core consumer prices remain relatively subdued. As a result, the European Central Bank is likely to keep asset purchases running. European equity valuations remain relatively attractive and consensus EPS forecasts are beginning to tick higher.
We still think it makes sense to diversify as widely as possible, particularly using alternative assets, which offer upside potential and insulation from the broader macro risks highlighted above. These would include listed private equity, where attractive discounts to net asset value can still be found, and alternative credit. Renewables and renewable funds have faced some headwinds since Trump came to office, but we continue to find a range of opportunities here.We also think it is worth having some inflation protection in portfolios, and this can be achieved by direct investment in Tips or linkers or through an inflation-linked fund. Investment in hard assets, such as property or infrastructure, can also provide some useful inflation protection.