Even the hyperbole-free International Monetary Fund in its latest update to the World Economic Outlook said that the election of Donald Trump has added “a wider-than-usual range of upside and downside risks” to its US forecasts, although that did not stop it from increasing marginally its two-year projections for US growth in light of that economy’s “momentum coming into 2017 and the likely shift in policy mix”.
For those on the bullish side, the argument goes something along the lines of, global growth is stronger, unemployment rates are lower and inflation and wages are finally going up. All of which bodes well earnings growth.
Those more worried souls are also aware of fundamentals, but are looking more at how richly priced many already are and what must happen for those valuations to be justified.
As Peter Toogood, investment director at The Adviser Centre points out, while investors have been vacillating between hope of a little growth-fuelled inflation and the fear of inflation unbridled, at a fundamental level, a healthy dose of scepticism is required.
“A world of abundant liquidity combined with few, if any, cheap assets is a vexing backdrop. We would argue that many markets remain vulnerable, with only limited opportunities to deliver the earnings growth to justify current lofty multiples.”
As Trump takes his oath of office on Friday, it is worth considering the magnitude of the task he has set himself because many markets seem to have taken him at his word. Should he succeed, returns could well be extreme, but should he fail there is now a very long way to fall.
