Have investment markets become complacent to uncertainties in this new era of politics?
Global share markets surged following Donald Trump’s election to President of the United States last November, however, many investors may now be reconsidering their options given the challenges he may face implementing his campaign pledges.
In a show of considerable power and decisive action consistent with expectations, Trump made self-described “incredible progress” within his first month in office. But, investors are still awaiting his promised corporate tax cuts, US$1 trillion in infrastructure investment and renegotiation of international trade agreements – and they’re becoming restless.
Division within the Republican Party has exposed certain risks to Trump’s key policies
In particular, there was intense opposition and hardline negotiations regarding the US Affordable Care Act – ‘Obamacare’. House Republicans spent five weeks trying to repeal and replace Obamacare but due to party infighting, they didn't pass a bill. Instead, trust within their ranks was eroded and investors got spooked – particularly in banking, manufacturing and small-cap stocks, which were expected to benefit most from Trump’s ‘America First’ agenda.
However, despite dramatic headlines, the market dip was relatively short lived. Investors quickly reassured themselves that Trump’s decision to abandon the health care debate, at least for now, provides greater impetus to move swiftly on tax reform, and US business and consumer confidence improved sharply in March – although rising consumer confidence often accompanies strong trailing market returns.
This market euphoria has largely discredited structural issues of a ballooning debt burden, widening social inequality, low productivity and job displacement due to technology. But of most concern to us is the growing divergence between economic policy uncertainty and equity market volatility – while economic policy uncertainty remains near all-time highs, equity market volatility remains near historic lows.
Across the Atlantic, Britain has now commenced its Brexit plan from the European Union
Removing itself from the EU in the next two years involves complex negotiations to unwind 44 years of interconnections in trade, immigration, security and health care. And the sheer size and duration of this task means it will likely have repercussions across global markets as negotiations progress and inevitable setbacks are experienced.
Elsewhere in Europe, following the unpredictability of elections and referendums of 2016, the stakes are raised for impending elections in France and Germany and the threat of protectionism and anti-globalisation is again rife. French Presidential hopeful, Marine Le Pen is vowing to host a ‘Frexit’ referendum – that could cause issues for global markets – but polls, which many have stopped trusting, suggest Le Pen will be thwarted in the second round of voting by Emmanuel Macron who paradoxically embodies globalisation and free movement.
Heightened valuations and increased geopolitical uncertainty warrant caution in investing
This is especially important to consider in the current geopolitical climate. In particular, if Donald Trump’s policies are delayed, watered down or fail to materialise, the US market will likely have little room for error. In fact, a survey by Bank of America Merrill Lynch found 34 per cent of fund managers believed stocks were “overvalued” – the highest level in its 17-year history – with 81 per cent identifying the US as the most overvalued market.1
In our view, it’s wise to exercise caution over broad-based exposure to US equities. We believe that more attractive opportunities to gain exposure to the fundamentals of the US economy exist within select areas of the residential property market and in private investments. In Australia, we look towards actively managed and value investing styles while advocating an appropriate level of cash to act as a liquidity buffer should further policy risks unfold.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.