Summary of key points
- The Trump rally in equities markets has faltered in recent weeks, but the longer term dynamic has stayed in place and has strengthened.
- Do not expect President Trump to become conventional, clear or consistent in his public utterances. This is a deliberate part of the disruptor strategy being adopted. He is not changing the habits of decades just because of a job change. It will continue to be a source of market instability around a longer-term positive trend.
- The longer term trend will be driven by the Trump administration implementing:
– Major cuts in corporate taxes.
– Increased federal spending and deficits.
– Reduced regulation. - Leading to:
– Higher bond yield
– Moderately faster economic growth in the USA and somewhat higher inflation.
– Faster growth in earnings per share of US and other companies. - Monetary policy may become less accommodative but is still broadly supportive of asset prices.
- 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 - Even allowing for such risk factors our updated valuation and momentum analysis lead us to recommend an increase in weighting to Australian and International equities to benchmark or neutral weight funded by a reduction in the overweight to cash and alternatives.
Do not expect President Trump to become conventional, clear or consistent in his public utterances. This is a deliberate part of the disruptor strategy.