From ‘Trump Bump’ to ‘Trump Slump’?; UK: ‘Reflation’ or the ‘wrong sort of inflation’?; Eurozone’s economic prospects improve; Currency devaluation cause and effect according to Trump; Economic insight: The commodity ‘super’ cycle
From ‘Trump Bump’ to ‘Trump Slump’?
After very intensive discussions of Tatton’s investment team and with external research providers, we have come to the conclusion that the ‘Trump policy risk factor’ is not yet appropriately recognised by markets that have just overcome almost a decade of Armageddon paranoia. The high valuations the US stock market has reached over the last 2 years therefore appear very vulnerable to a renewed shock in business confidence. Having outstripped equity returns over the past 5 years compared to all other developed markets by approximately a factor of 3 (!), we believe it is now prudent to take some profits on our US portfolio positions and reinvest the proceeds in regions which are less highly valued and less exposed to the immediate ‘Trump risk’.
UK: ‘Reflation’ or the ‘wrong sort of inflation’?
Just as inflation can corrode household spending, it will also impact market’s assessment of asset values and returns. If nothing else, higher inflation must imply the use of higher discount factors for future income streams, which in turn means lower current (and future) asset values. The combination of relatively high inflation, slowing economic activity and general uncertainty may cause investors to reconsider their current UK allocations.
On a balanced assessment this puts UK stock market investments at a relative disadvantage to their European peers, who are starting from lower valuation levels, with less uncertain prospects and less headwinds from inflation.
Eurozone’s economic prospects improve
Overall, the EZ economy looks well-placed to benefit from the continued solid momentum across the world which for the first time in 5 years has become synchronised. After years of moving from crisis to crisis the prospects for the European economy are now looking bright, which makes many flourishing companies look relatively cheap in terms of their surpressed share price valuation. Interestingly, this doesn’t just apply to exporters, but also the domestically focused sectors, as consumer demand in Germany and elsewhere has entered a positive uptrend. This makes European stock markets as well as the Euro as a currency a considerably more attractive investment target than the very highly valued USA equities and USD.
Currency devaluation cause and effect according to Trump
It would seem that the Trump administration is breaking with a long-standing bipartisan policy of supporting a strong dollar and pursuing a new policy of ‘talking’ the dollar down, in order to provide support to exporters and make life harder for importers. As a result of these comments, the US dollar experienced its worst start to a new year in almost 30 years.
It must have been disappointing for the new president that the US Fed refused to fall into lockstep with his very optimistic economic outlook and in a fairly dovish turn left rates unchanged this week and even hinted that a further rate rise in March may be off the table.
Economic insight: The commodity ‘super’ cycle
The dynamics of the oil market – and in commodities more generally – are changing. And, we believe this change will mean less of the extreme boom and bust cycles of old, for now at least.
This has meaningful consequence for global investment dynamics. For one, now that the unwind of the excesses of the ‘commodity super cycle’ has been flushed through the system, the headwind it generated over the past 2 years for connected industries like manufacturing has passed. Secondly more stability in energy prices and some other commodities subdues the extreme variability of one of the important variables and drivers of the cyclicality of the economy. Reduced levels of uncertainty – at least in this aspect of the economy – are positive for growth. We cannot be quite sure yet, but this may be another reason for the more synchronised economic growth picture around the world.
Read the full Tatton commentary here