However, despite Trump having signed a flurry of executive orders during his first weeks in office, there is no sign yet of any concrete policy proposals that would meet market expectations. The indecisiveness of the Trump presidency also has a positive side though: the White House announced a 20% tariff on Mexican imports to pay for building the border wall/fence last month, but hasn’t shown signs of implementing this. This suggests markets may be right to have ignored the announcement.
Benefit of the doubt
“We have been looking at what the outcome will be from expected fiscal easing and a more hawkish Fed, as well as Trump’s migration policies and trade barriers. Taking all the above into account, Trump in the round is likely to be neutral to negative for GDP growth, which means the market is clearly giving Trump the benefit of the doubt at this point,” says Burgess.
But this won’t last forever. It’s close to certain that markets will be bound for a correction if Trump fails to deliver on his deregulation and/or tax promises during his first 100 days.
Net inflows from European investors, though still significantly above the long-term average, are coming down. Viviani therefore stands ready to cut down his allocation. “We’ll reduce our US equity exposure if the Q1 earning season disappoints,” he says. And one of course shouldn’t forget about the countless tail risks surrounding Trump’s presidency, none of which are currently priced in, with the most prominent one being protectionism.
“But even in relative value terms, I’m not so sure that [such measures] would penalise US equity more than Asian or Europe equity,” says Viviani. However, US equities are trading on valuations (17.6x 12-month forward PE, the highest since 2014 according to Factset) that leave no room for disappointment. This is not the case for other developed market equities, let alone for emerging markets which trade on valuations below their historical averages and are experiencing upgrades of their earnings forecasts.
