President-elect Donald Trump’s ‘growth-friendly’ policies are already priced into markets and investors should therefore approach equities with caution this year, according to a number of multi-asset fund managers.
Not only this, the investment professionals warn that high levels of dollar-denominated debt should also be taken into consideration, especially given the level of fiscal loosening being anticipated by markets.
In the run-up to the US presidential election last November, many industry commentators voiced concerns surrounding a hypothetical Trump win, given how little was known about his policies and his divisive views on trade, climate change and immigration.
Since the election, however, developed equity markets have performed well, with the S&P 500 and FTSE 100 indices up a respective 6.18 and 5.95 per cent to-date. This has been partially attributed to Trump’s proposals for fiscal expansion, tax cuts and, subsequently, potential rate hikes from the Federal Reserve and a rise in inflation.
Performance of indices since US election 2016
Source: FE Analytics
While an inflationary boost and heightened growth prospects would indeed spell good news for the economy, there are multi-asset fund managers who believe this optimism may not be justified when it comes to equity market behaviour.
In an article published yesterday, Rathbone’s CIO Julian Chillingworth said he is cautious on global equities given the uncertain geopolitical backdrop.
“Investors appear to be giving Donald Trump the benefit of the doubt, emphasising the positive impact of his proposed fiscal stimulus measures rather than any potentially damaging trade policies he may enact. We believe this is a leap of faith,” he said. 
“We believe today’s ERP [equity risk premium] may not be high enough to compensate investors adequately for the political uncertainty ahead.”
William Littlewood (pictured), manager of the Artemis Strategic Assets fund, says Trump is in a strong position given the Republican party holds both the Senate and the House of Representatives.
That said, he points out that many of his proposed policies – such as a trillion-dollar infrastructure investment and tax cuts to the middle-class and corporations – may not happen given these factors would negatively impact his supporters, most of whom have low wages.
“Trump expects to rejuvenate the economy, enabling a boom in infrastructure to be affordable. This looks improbable to me,” he said.
“More likely the trade deficit will rise and there will be a return to ‘boom and bust’ economics. These policies are clearly reflationary and the upwards movement in bond yields looks justified.”
He argues that globalisation would also reverse and international trade could slow down, given the president-elect’s promise to build a wall across the Mexican border and his diminishing relationship with China.
The manager also points out that Trump’s protectionist rhetoric when it comes to preserving American jobs could increase the chances of a damaging trade war.
“Whilst one could argue that these reflationary, ‘America first’ policies might boost economic growth in the short run and be good for equities, they look unambiguously bad for bonds,” Littlewood continued. 
“Trump has often described himself as the king of debt. In June this year he went further, declaring ‘I’m the king of debt. I’m great with debt. Nobody knows debt better than me.’ ‘I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.’ ‘You go back and you say, hey guess what, the economy crashed.’ ‘I’m going to give you back half.’ Watch out, bond-holders.”
Henderson’s James de Bunsen (pictured), however, believes that US equities are of particular concern this year and doesn’t think the country’s stock market will outperform in 2017.
“Markets have gone from incredulous to credulous when it comes to Donald Trump,” the co-manager of the Henderson Alternative Strategies trust said. “Every ‘growth positive’ policy he’s espoused so far has already been baked into valuations.
“Yes, tax cuts and infrastructure spend will give both short-term and long-term boosts to GDP to some extent but other prospective policies are decidedly anti-growth, such as increased protectionism.”
“And perhaps more importantly, higher inflation expectations resulting from Trump’s fiscally expansionary policies at a time where the employment market is already tight may force the Fed to tighten more aggressively than currently forecast. This will be negative for equity valuations.”
David Jane, manager of Miton’s multi-asset fund range, says US trade priorities may now favour developed markets but are likely to spell trouble for Asia and emerging markets.
Also, while many investors have focused on the healthy performance of the US equity market, he says the eurozone and Japanese markets have actually achieved stronger returns in local currency terms.
“In our view, Trump will likely put US interests as paramount in all negotiations which leads to a very different regime. Clearly, those offering cheap labour to replace US workers have little to offer Trump in trade negotiations, whereas those, such as Europe and Japan, where labour costs are similar or higher have a much stronger position,” he explained.
Performance of indices over 1yr
Source: FE Analytics
“Trump is likely to look at international affairs like a businessman (what’s in it for the US), rather than the political approach taken before (where promotion of liberal democracy took precedence over US domestic interests). The consequence of this is the strong will get stronger, while the weak will suffer.”
While he says it is too early to predict a re-run of the Asian crisis in the late 1990s, Jane warns that the heightened potential for rate hikes and the high amount of US dollar debt globally could be an issue further down the line.
“The other consequence of the election has been the dramatic strength of the US dollar. While this can simply be seen along the lines of ‘strong US economy means strong US dollar’, there is a circularity to this argument as the strong dollar has a dampening effect on the global economy, particularly in Asia,” the manager reasoned.
“The strong dollar may also have unforeseen negative consequences for countries and companies with excessive amounts of US dollar denominated debt.”