Andy Morris, Chief Investment Officer at James Brearley Investment Managers & Stockbrokers, details his thoughts
on the stockmarket.
Does the US now have a Trump card to play?
aterms of global significance now clearly resolved following Donald Trump’s resounding victory, which was at least thankfully uncontroversial compared to his defeat 4 years ago, the business pages have been busy reporting that the ‘Trump Trade’ is in full swing. Whilst it is certainly true that the swift election result has removed some uncertainty for investors, it is not clear what Trump 2.0 actually entails and whether the early moves will last.
The immediate reaction from equity markets was positive, as investors got excited about the prospects of further corporate tax cuts and de-regulation, whilst initially bond markets wobbled at the thought of the budget deficit increasing further and bond yields rallied. In the following days these moves reversed a little as equity markets retraced on the prospect of sweeping tariffs, whilst bond yields eased in the hope that the bond markets could keep fiscal discipline in check. None of this should be surprising as in effect new uncertainties have replaced the pre-election jitters. In short, the ‘Trump Trade’ is a rather vague hotchpotch which doesn’t easily translate into a specific investment strategy, particularly when asset prices had already run up ahead of the election. The only thing that can be said for sure about the famously ‘transactional’ President elect is that he is unpredictable. Our view is that investors should avoid trying to make short term trades, as the cliché that ‘time in the market; beats timing the market’ still rings as true as ever.
All this leads to the question of whether the US equity market, led by the large cap tech stocks, can be expected to continue its domination of global equities over the next four years? After all large cap US growth stocks have posted stellar performance since the financial crisis over 15 years ago. Since then, it has continued to defy the naysayers and attract global capital inflows, whilst the UK, Europe and the rest of the world has struggled badly by comparison. Throughout this period there has been much talk of ‘mean reversion’ and a ‘growth to value’ switch, which have never materialised beyond a few months here and there. Anyone betting against the US has paid dearly. As always though, the question facing investors is the future, and with the US market now standing close its all time high cyclically adjusted valuation multiple, whilst Europe and the UK sit at discounts to their long-term average, is it now time to move portfolios towards the lower valuations with a lower margin of safety?
The next 15 years are highly unlikely to mirror the last and with zero interest rates now also firmly in the rear-view mirror we would not expect large cap growth stocks to continue their recent domination. That said, the US economy is much more dynamic and has a lot of structural advantages along with a much less cautious attitude than Europe. In addition, Mr Trump ascribes great importance to the stockmarket as a barometer of his success as a President. On balance we don’t believe this is the time to move away from the US despite its higher valuations, although investors should be cautious of the record concentration levels of the major US equity Indices which could act as a break on the S&P 500 even if the US economy continues to perform well.
Investing in stock market-based investments may not be right for all investors. You should consider carefully and/or seek professional guidance before investing. The value of an investment and any income from it can fall as well as rise as a result of market and currency movement and you may not get back the amount originally invested. James Brearley and Sons Limited is authorised and regulated by the Financial Conduct Authority (FCA). FCA Reference Number 189219.
If you would like information on how James Brearley can assist in managing your investments, please contact us at enquiry@jbrearley.co.uk or telephone 01772 318760.
