Summary of key points
- The mild Trump inspired euphoria continues in the equities markets while pain persists in the bond markets.
- Both are driven by the same expectations of a Trump administration:
- Major cuts in corporate taxes
- Increased federal spending and deficits
- Reduced regulation
- If these are implemented we will likely see:
- Much more issuance of US long term bonds leading to higher bond yields.
- Faster economic growth and higher inflation.
- Faster growth in earnings per share of US domestically oriented companies.
- In the shorter-term equity markets may well be disappointed if there is any extended delay or disruption to the Trump agenda. Volatility may well continue for some months to come.
- Given the more positive medium term prospects in the US, any shorter run declines in the equity markets may eventually prove to be an opportunity to accumulate equities at better than usual prices, albeit on a selective basis.
- Monetary policy may become less accommodative but withdrawal of the stimulus of the last eight years will be gradual, providing support to equity prices for longer than was expected.
- In summary be watchful and patient in coming months but do not lose sight of an emerging opportunity to redeploy cash into equities at what may be favourable prices given a change for the better in the medium term economic outlook.
- Risk factors to be aware of include:
- Any deadlock that re-emerges between the US Congress and the President.
- The potential for Chinese credit and lending that is now being reined in selectively by provincial governments to stall or be interrupted.
- Growing market concerns about the strength of some “globally systemically important financial institutions” in Europe, including the biggest banks in Italy.
- These factors together with our updated valuation analysis lead us to recommend continued underweighting with a cautious increase in weighting to Australian equities whilst maintaining an underweighting to international equities other than the US.
Be watchful and patient in coming months but do not lose sight of an emerging opportunity to redeploy cash into equities at what may be favourable prices.