If there’s one thing that has characterised the Trump presidency, it’s the volatility of his temper and the frequent chaos his pronouncements and actions cause. Who would want to be his press secretary? Normally, Trump’s erratic nature wouldn’t matter too much to markets, because longer-term fundamentals tend to drive valuations.
Right now, however, the stream of tweets, sackings and policy u-turns emanating from the White House are having a negative effect on sentiment. This is for three reasons:
• Investors have priced a great deal of good news into share prices, based on the Trump agenda – from increased infrastructure spending, deregulation (especially of the banks), repatriation of cash held by US corporations overseas, reform of the tax code and the prospect of significant cuts in personal and business taxation. Some of this optimism is now unwinding.
• The turmoil in Congress surrounding the investigation into alleged Russian interference in the presidential election and the sacking of the Director of the FBI, is pushing back the administration’s legislative agenda. The prospects for tax reform are receding and the completion of the repeal and replacement of Obamacare is also looking less and less likely, even though it has passed through the House of Representatives.
• It is six months since Trump was elected and the Republican Party swept Congress and the presidency. Anxious republicans are now looking toward the mid-term elections of late 2018, when all 435 seats of the House of Representatives and 34 of the 100 seats of the Senate will be contested. Nervousness about the President’s unpredictability and their own prospects of re-election will make his party colleagues less likely to embrace his agenda; and were the Democrats to regain either the House or the Senate, gridlock is likely to ensue, given the almost total collapse of bipartisanship.
But the real world is helping keep the show on the road
However, there is some better news to help shares, both in the US and elsewhere. In America, the economy continues to grow robustly and unemployment is now very low. In Europe, the momentum of the recovery continues to gather pace, unemployment is falling rapidly and political risks seem to be abating; while in the UK, the probable re-election of Theresa May’s Conservative Party is unlikely to hurt market sentiment. Finally, in China the authorities are managing the economy carefully to avoid any embarrassing hiccups in the run-up to the five yearly Communist Party congress, due in the autumn.
After years of extraordinary monetary policy, the debate in central banks across the world has moved to the removal of emergency liquidity support. Whisper it quietly, but perhaps QE has actually worked – at last! Earnings growth is solid across the world, which is a key driver of equity market direction and is crucially important given high valuations in the US stock market.
We’re continuing to maintain a full weighting to shares in this environment and are looking to progressively increase our exposure to Europe, where valuations look attractive to us, especially in the banking sector. We’ve been overweight in the US for a long time and are taking advantage of the gains we’ve seen there to fund this move.
We still find little value in government bonds, preferring corporate debt and other fixed income assets that can provide returns in a rising interest rate environment. Finally, we’re continuing to make significant allocations to alternative assets in most portfolios. In a world where we expect only modest upside from many asset classes over the next couple of years, we think this area offers solid risk-adjusted returns.
Investment involves risk. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.