All this week, Morningstar.co.uk will be bringing you a Guide to Investment Ideas for 2017; stock picks, market reactions and political forecasts from the investment professionals.
“Part of me wants to get as enthusiastic as the market suggests about a Trump presidency,” says Ron Temple, head of US Equities for Lazard Asset Management. “But I’m having a hard time.”
The election of Donald Trump is arguably the biggest political upset in modern history; the first US president never to have held office or a position in the military, a reality television star who rode a wave of controversy all the way to the White House. Yet to look at the S&P 500 you would think Hillary Clinton, two-term First Lady and former US Secretary of State had won the election. The news of Trump’s success caused a minor blip in markets, before US stocks climbed even higher – continuing their near eight-year rally.
“I am optimistic in general about US equities,” said Temple. “The rotation into stocks from is encouraging as it is a return to fundamentals. Bond proxies have been the victim of the election, where other sectors such as financials and energy have really done well out of it.
“But I do not think inflation will be as high as some people are predicting, it will happen but not with severity being priced into the market, which means muted benefit to stocks over bonds. I think fixed income has sold off too much.”
Disillusioned Voters
The median US household income peaked in 1979; after nearly four decades of decline it is hardly surprising many voters were left feeling disillusioned.
“Too many voters felt ‘the system doesn’t work for me’,” explained Temple. “There is a populist rage across the West as the elite has failed to explain why globalisation is good for everyone. Now Trump is elected the geo-political risk is large and markets are not pricing it in. There are areas of diplomacy risk that are already established – the range of scenarios has widened.”
Political analyst Kim Wallace warns that these disillusioned voters are unlikely to benefit from Trump’s planned tax cuts either. Wallace, now executive managing director at Renaissance Macro Research, formerly served as part of the Obama administration.
“The people who voted for Trump are the least likely to benefit from his cuts to personal and corporate taxes,” he predicted.
Uncertainty Remains
Trump is just two and a half weeks from his inauguration as the 45th President of the United States, but his policies lack clarity and his actions – calls to Taiwan and Pakistan within weeks of the election – have caused concerns.
“The Republicans may have won majorities in both houses but Trump remains a huge uncertainty trade,” said Wallace. “You have an incoming administration that looks to be full of successful people – but none of whom has ever served in government. The learning curve will be very steep, hopefully in six months’ time we will have a better idea of what the next four years will look like.”
