The initial optimism in markets following the election of Donald Trump as president has wavered recently after its healthcare bill failed to gain enough support to pass through Congress.
Trump’s first political defeat as president cast some doubt over whether he would be able to deliver on other campaign promises, most notably those related to taxation.
Cormac Weldon, head of US equities and manager of the £559.3m Artemis US Select fund, says businesses had been buoyed by the election of Trump and the prospect of a change in administration.
He said: “The market is up a lot, a Republican president elected on promise of tax cuts and deregulation has increased optimism and the market is expecting it will turn into real momentum.”
Performance of S&P 500 since Trump victory
Source: FE Analytics
However, Weldon says the failure by Trump to pass new healthcare legislation would have been “disappointing” for the administration but was unlikely to affect plans to cut taxation.
“The failure of this legislation is the failure of a complex piece of legislation dealing with a very complex issue for which there are no easy answers,” he said.
“What the administration is moving on to now is tax legislation where it will be somewhat easier to achieve something. There is a caveat to that.
“The reason the administration dealt with healthcare to start with is that they wanted to cut some of the budget to free up money for tax cuts.
“The ambition of their tax legislation will be somewhat reduced, we believe by the failure of the healthcare legislation.”
The manager says that without new healthcare legislation, questions have been raised at whether the administration’s tax legislation will take the form of tax cuts or a broader reform of the system.
“It really points to the tension of Donald Trump versus at least part of the Republican party: Donald Trump who wants to spend a lot of money and part of the Republican party who at least are still fiscally conservative,” he said.
Weldon says the failure of the healthcare bill doesn’t “kill the tax legislation” but would make it more complicated.
Obamacare had been among the regulations that businesses were most concerned about and the defeat of Trump’s bill is likely to dampen some of the market optimism.
“There are talks that there is room for him to go back and renegotiate with the drugs companies,” said Weldon. “There will be smaller pieces of legislation or executive orders, which address some of the peripheral issues.”
He added: “Obamacare and Hillary weren’t the problem with healthcare it’s the fact that the budget is too high and growing too fast.
“While the legislation that failed would have helped in some ways, we think the basic fundamentals have to be dealt with at some point.”
Weldon – who also oversees the £163.3m Artemis US Smaller Companies and £25.8m Artemis US Equity funds – says it had remained underweight healthcare given some of the uncertainty surrounding the sector.
“The biggest change we made leading into the election and in the immediate aftermath was to increase financials,” he said. “Broadly Republicans and Trump are positive for the banking sector with regards to tax cuts, deregulation and to some extent we believe more inflationary policies.”
However, Weldon noted that performance of the US Select fund had been disappointing more recently.
The fund was up by a solid 26.78 per cent over the past year, although it has underperformed the average IA North America sector fund’s 29.81 per cent gain and a 31.36 per cent return for the benchmark S&P 31.36 per cent
Performance of fund vs sector & benchmark over 1yr
Source: FE Analytics
“We’ve talked somewhat about underperformance last year and been underweight bond proxies,” he explained. “We’ve given up a little bit of performance year-to-date, but we remain optimistic about the opportunities we’re seeing in the market.”
Weldon says Trumponomics and a Republican government are going to be much more favourable to the domestic US economy rather than the broader economy.
Indeed, talk of trade wars and renegotiating deals have spooked some investors who fear US exporters could be hurt by any tit-for-tat actions.
“We have part of the White House, Trump and Steve Bannon who are antagonistic and talk constantly about bad deals,” he said. “On the other hand, the business friendly part of the White House - Gary Cohn of Goldman Sachs for example – has a much more balanced view of this issue.”
Weldon says there may be some renegotiating of current deals although US businesses have approached the administration to “educate” it on the realities of global trading.
One other concern highlighted by Weldon is whether Republicans in the Senate will agree to expanding the US debt ceiling.
The manager says while the tension between the administration and more fiscally conservative Republicans may heighten, many who are up for re-election may be more relaxed about any attempt by Trump to raise the limit.