As we approach the end of 2016 we would like to comment on the state of the markets.
A few weeks after the US Presidential Election, and having time to reflect on Donald Trump’s seemingly ‘improbable’ victory, love him or hate him, it is effectively middle America’s retribution against the political establishment.
Globalisation and free trade, whilst significantly benefitting developing counties, has had negative impacts upon the middle class manufacturing jobs in developed countries and on wages growth. Wages have not grown in the US since 1996.
Overnight the U.S. share market looked like it was going to tank, but in the end, closed the day higher. You wouldn’t want to be the person who hit the sell button based on the news at the time.
Trying to ‘time’ such volatile markets only highlights that having an investment strategy based on reacting to news headlines probably isn’t going to help in building long term wealth.
US Election Result and the Markets
The sectors that would have been hit by a Clinton win such as banks and pharmaceuticals ended up rallying strongly – whilst beneficiaries of increased growth and increased infrastructure spending also rallied strongly. In addition defence stocks also rallied strongly. Low corporate tax rates – dropping from around 35% to 25% or under should increase Earnings per Share (EPS) growth for corporate America (Personal tax rates will be 12%, 25% and 33% if Trump’s policies are enacted – which would be positive to consumption expenditure).
The counter argument with respect to equities is that Trump’s anti free-trade stance has negative implications for world trade and hence growth – and with over 40% of S&P earnings derived from offshore, there could be negative implications for those stocks reliant upon offshore earnings.
It will be interesting to see whether Trump’s comments were partly rhetoric as part of the election battle and what he can actually achieve in the real world. Whilst markets hate uncertainty and volatility could increase, a case can be made for markets to perform quite well if US economic activity increases.
The other major implication of the Trump presidency is the impact upon interest rates.
Medium term, if the growth scenario pans out, we are likely to see higher inflation and up to four interest rate hikes next year. This is not necessarily bad as we are coming from a very low base, the Fed wants the economy to run slightly hot (to use Yellen’s words) and higher interest rates do imply higher growth. The risk of course is the interest rates go too high for too long.
The reaction in markets (and even more so, the media) is reminiscent of Brexit vote by the British people to leave the European Union in late June. While there are fundamental differences between the two (i.e. that a presidency is not permanent), some parallels can be drawn – a divisive campaign, an unexpected result and palpable fear about what the future holds.
Like Brexit, it is near impossible to measure what the outcome immediately means for the country’s citizens, let alone for the economy and financial markets. What we can measure however, are valuations in investment markets. Your portfolio is driven by long-term valuation-driven investing, which means we’re not crystal ball gazing and trying to predict the outcome and implications of elections.
While it may feel uncomfortable to read the headlines when you pick up the newspaper, the rollercoaster ride in financial markets is nothing new. On this occasion (as in the past), we encourage you to look through the market noise and panic and remain focused on the bigger picture.
As long term, valuation driven investors, with a focus on the preservation of capital, it is our belief that under or overvalued markets will return to their fair value, or what they are really worth, over time.
Negative sentiment and heavy selling, often driven by fears of what might happen, have historically created the best opportunities for value investors. From your current conservative positioning we’ll continue to monitor markets and rest assured your Fund Managers look to buy quality assets that are ‘on sale’ using a higher level of cash that are held for times like these.
It will be important for your portfolio to be nimble, flexible and fully diversified going forward.