The big question for clients this year is whether the policies of U.S. President Donald Trump will succeed in boosting U.S. economic growth.
Depending on how the economy and markets react to these policies, you and your clients should be prepared to make portfolio changes if needed.
Your clients also will have to be patient because financial markets are likely to be volatile as market players try to determine the implications of what the controversial new president says and does.
For now, however, “markets are assuming that Trump will be fairly pragmatic, going for policies that are reflationary and will stimulate growth, such as corporate tax cuts, deregulation and boosting infrastructure spending,” says Stephen Lingard, senior vice president, Franklin Templeton Solutions, a unit of Fiduciary Trust Co. of Canada, a subsidiary of Franklin Templeton Investments Corp.
Many of the global portfolio managers interviewed for Investment Executive‘s (IE)Outlook 2017 report (see pages 11-26) suggest overweighting equities. There’s little enthusiasm for fixed-income investments: with interest rates expected to continue rising, bond prices will drop.
As far as equities are concerned, U.S. stocks are favoured – at least, for the first half of the year. “U.S. stock valuations could be upgraded as markets factor in the positive impact of lower corporate taxes on earnings,” says Charles Burbeck, co-head, global equity portfolios, at UBS Global Asset Management (U.K.) Ltd. in London, U.K.
The question is whether this trend will continue through the rest of the year. Some portfolio managers, such as François Bourdon, chief investment solutions officer with Fiera Capital Corp. in Montreal, believe it will.
Bourdon assumes that Trump’s promised deregulation policies will get companies investing in machinery, equipment and new processes, resulting in a 3% increase in real gross domestic product (GDP) in the U.S. this year, considerably more than the 2%-2.25% assumed by most of the other portfolio managers interviewed for the IE report.
Others are less confident. Lingard warns: “There could be a 5%-10% pullback in U.S. equities if volatility picks up.”
And Wendell Perkins, senior portfolio manager at Manulife Asset Management (U.S.) LLC in Chicago, suggests there could be a 10%-15% correction in the equities market.
Nandu Narayanan, chief investment officer with Trident Investment Management LLC in New York and portfolio manager of several funds sponsored by Toronto-based CI Financial Corp., believes Trump’s policies will only briefly delay the global recession that he is expecting.
These divergent opinions suggest that you and your clients should review how clients’ portfolios are positioned in three months or so. At that point, the direction of Trump’s policies – and the reaction of the U.S. Congress to those policies – should be more apparent.
Nevertheless, there are investment opportunities that should remain solid, regardless of what Trump does – at least, as long as he doesn’t set off a major trade war with his threat to put on high tariffs on goods from countries he thinks are competing unfairly in the U.S. market.
These opportunities include U.S. stocks, but there are also possibilities in many other parts of the world – including China and emerging markets, such as Colombia (see page 18) and South Korea (see page 20), as well as in undervalued European and Japanese equities.
In terms of sectors, most of the portfolio managers interviewed for the IE report favour banks because rising interest rates will increase their net interest margins – the difference between what banks charge customers for loans and what is paid on deposits.
This is especially the case for banks in the U.S., where the U.S. Federal Reserve Board increased its overnight interest rate in December and is expected to increase that rate at least twice more this year.
However, banks elsewhere also are likely see some increase in their net interest margins as medium and longer rates in those countries follow, to some degree, the boost in the U.S. interest rate.
Resources firms are more problematic. Commodities prices aren’t expected to continue climbing at 2016’s pace, so commodities stocks are unlikely to duplicate last year’s rise. However, there are opportunities in resources firms likely to experience volume growth that isn’t yet priced into their share prices. (See page 18.)
There also are certain opportunities in consumer discretionary, technology and infrastructure stocks.
Not surprising, the portfolio managers prefer companies specializing in e-commerce because these firms continue to take market share from traditional retailers. U.S.-based Amazon.com Inc. heads the list, but there are two China-based companies with excellent prospects. Travel-related stocks also are considered good opportunities: picks include U.S.-based Priceline Group Inc., Hong Kong-based Samsonite International SA and Macau-based Sands China Ltd. (See page 22.)
U.S.-based firms are dominant among technology stocks, but there are several interesting opportunities, particularly in Asia. (See page 24.) These include China-based search giant Baidu Inc. and Tencent Holdings Ltd., a conglomerate involved in gaming, social messaging and e-commerce. There also are companies involved in robotics; the Internet of things, which allows operation of appliances from a distance, for example; and artificial intelligence, which is key in developing self-driving cars.
With many governments focusing on infrastructure spending to create jobs, there will be opportunities to invest in firms that benefit from this spending. These include U.S.-based firms, such as American Tower Inc. and Crown Castle International Corp., but also international players, such as Spain-based Ferrovial SA and Australia-based Transurban Group. (See page 22.)
However, investors will find that in many cases, private firms are the key players in infrastructure projects.
The portfolio managers who are focusing on Canadian equities have a soft spot for banks, consider life insurers interesting and are finding opportunities in energy. They are more selective in consumer staples, consumer discretionary and industrials, sectors in which stock valuations are high. (See page 14.)
Not surprising, there’s little interest in utilities and telecommunications, which tend not to perform well in a rising interest rate environment.
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