Dubai: Donald Trump’s shock election victory took US equities to all-time highs in November as government bonds, the yen and emerging markets suffered losses.
Leaving aside the post-US election knee-jerk reactions of global markets, ramifications of the Trump win, macroeconomic changes in the US and potential regime changes in Europe, investors need to rebalance their portfolios, David Pinkerton, Chief Investment Officer, Falcon Private Bank, Abu Dhabi-owned Swiss bank told Gulf News in an interview.
While president-elect Trump’s pledges to boost infrastructure spending have fuelled bets on stronger US growth and higher interest rates, Pinkerton said equities in general tend to follow the earnings trend in the long term.
“Historically, three months before presidential elections in the US equities tend to sell-off because people are anxious on what is going to happen so they tend to be cautious and equities go down but the average performance of the equity markets after the elections are generally up,” he said.
The US market was down a lot in the October of 2015 and was down again January and February this year. But it bounced back midyear. Most of the volatility in the US equity market has been explained by the fact that the overall earnings have not been growing for the past six quarters. But for this quarter the earnings are up.
Inflation expectations
The expectations in the US are on the rise in response to the moves by new administration to reduce taxes, increase investment, and ease regulations. Potential for an improvement in growth and inflation expectations through the fiscal stimulus is supportive of equity market gains.
The US economy seems to have reached a relatively long period of declining inflation. Bonds do better when inflation is coming down and they do worse when inflation is rising. Last time when the economy had long term spike inflation was between 1950 to 1980. Since 1980 when interest rates were about 18 per cent, they have been coming down. Market analysts say the recent bond sell offs are largely driven by potential rise in interest rates. There are signs that the US economy is entering a period of rising inflation.
When inflation is rising, equities outperform bonds by a significant margin. “If we believe that we are in a period of rising inflation we should allocate to equity. We believe that we are headed into a longer period of rising inflation. Even if deflationary trends persist we believe investors will be better off in selective allocation in equities,” said Pinkerton.
Developed market bonds do not make much sense under the current market conditions. In Europe most bonds have negative yields for a long time.
“We are in the camp that there is more pressure towards inflation than deflation. There are offsetting pressures like technology and excess supply of oil. These are some of the things keeping inflation under control, but generally inflationary pressures are building and the reasons for that are the political landscape,” he said.
Anti-globalisation trend
Anti-globalisation rhetoric is seen changing political landscape across the developed world.
“Trump won basically because there is a general sentiment on the main street that globalisation as a policy has not helped the US labour. It is not just the US, it is in Europe too the sentiment is reflected. Brexit too won on that platform. We are hearing more and more politicians echoing similar views in Europe,” said Pinkerton.
Trump’s policies seem to be anchored in fiscal expansion. When quantitative easing started people said central banks will keep kicking that can down the road. When we reach the end of that road, what can governments do to stimulate the economy? “Now, instead of kicking the can down the road, may be it is time to build new roads. And that is what Trump is been promising,” he said.
In fiscal stimulus programmes, Trump will face a hurdle in the form of the debt ceiling that has to be raised in February next year from $20 trillion to a higher number. “This time around it may not going to be a huge challenge as Republicans have majority in both houses of US Congress,” he said.
