It is hard to recollect another year that produced as many shocks as 2016. The two obvious highlights were the vote for Brexit and then Donald Trump winning the US presidential election.
The world of politics has been no less interesting in 2017. Mr Trump’s first 100 days have hardly been uneventful, while this is also the year of elections in Europe, with Germany still to come. In the UK, a national poll (whether for a referendum or a general election) seems to have become an annual event.
Contrary to most people’s expectations, equity markets have largely taken all this political turbulence in their stride. Volatility is still at historical low levels and the second-longest bull market in history just keeps on going. It is currency markets where we have seen much more volatility so far.
This is great news for equity investors but also poses a dilemma: what to do next? It is difficult to find any significant value across equity markets right now. This does not mean you should disregard stockmarkets but rather wait for buying opportunities.
Markets rarely go up in a straight line and we expect intermittent corrections in the 5 per cent to 10 per cent territory. We saw this happen before last Christmas in Asia and emerging markets, where fears about US protectionism and changing trade agreements saw both fall and gave us the opportunity to top up our weightings.
Emerging markets and Asia have underperformed developed markets in recent years and there is clearly room for some equalisation. We also want to add to our positions in Europe but are happy to be patient and wait for buying opportunities.
There is nothing that has materially altered the trend in economic growth or inflation and we are not rushing to change our portfolios. To provide some contrast – and define where we would alter our exposure significantly – the oil price fell from $100 to around $50 in the summer of 2014. Such a shift was unexpected and had an immediate impact on economic growth and inflation targets, which is when we believe it is important to revise the tactical allocation.
Smaller companies are typically seen as a purer play on the domestic economy and, as such, the IA North American Smaller Companies sector has been a big beneficiary of investors looking to express a bullish view of Mr Trump. The small sector is home to just 14 funds and the average fund size has grown from £275m pre-Trump last October to more than £400m today. The sector has been bolstered by inflows of £77m, £54m and £29m in November, December and January respectively.
Mr Trump is a businessman rather than a politician so is generally seen as pro-business but I have concerns over the extent to which he can implement his promises. He may find his business life has not left him well equipped for the slow pace of government. Corporate tax reform has dominated sentiment, but not all his likely policies will be so business-friendly. In my view, his protectionist agenda will only hurt the US consumer and economy.
