Committee chairman: Fund Strategy features editor Beth Brearley
The pressing questions of the moment are who will be the next US President and what impact will the outcome have on markets?
With Clinton and Trump never far from being neck and neck in the race, do investors have a preference for who will be the next leader of the free world?
While Clinton plans to hit wealthy individuals with higher taxes, she is seen as being the more reliable of the two candidates. However, there seem to be pros and cons to either candidate passing the finishing line. While both have proposed fiscal expansionary policies there are also elements of protectionism in their proposals, which would not fit well with the role of the US in the global economy.
Investment commentators note that the President will not, of course, operate in isolation, but any new policies will have to be approved by the House of Representatives. Moreover, Presidential tenure is relatively short with respect to the timeframe for long-term investments.
Of greater concern, it seems is the movements of the Federal Reserve. Despite comments by the head of the Federal Reserve, Janet Yellen, to the contrary, commentators are doubtful we will see a rate rise in December so soon after the election and against the rising dollar.
In the equity markets, share prices have charged higher this year, largely supported by a rally among the defensive sectors, which yield-hungry investors have used as bond proxies. Despite the buoyant market, investors have retreated. With valuations now looking toppy are we likely to see a pullback in the US market?
John Husselbee, head of multi-asset, Liontrust Asset Management
It seems that many citizens in the West are becoming more frustrated by an era of globalisation and the voice of nationalism can be heard louder and louder. This is a bandwagon that Donald Trump is happy to front, with promises to renegotiate trade agreements with China and close neighbour Mexico.
It also seems that Hillary Clinton is not adverse to similar narrative on trade. This form of protectionism does not bode well for the growth of the global economy, to which the US remains the largest contributor. As the presidential campaign race enters the final lap, it seems that, for now, the markets believe Clinton will persuade her nation to elect the first female president to the White House.
In the meantime, the US equity market seems to be near the top of the range in terms of valuation and investor sentiment. This is supported by the seeming inability of the Federal Reserve to push on with interest rate normalisation despite low levels of unemployment and early signs of wage growth.
Tim Cockerill, investment director, Rowan Dartington
There are four issues which are going to have an impact on the US. The Presidential Election, the state of the economy, the outlook for interest rates, and the valuation of the market.
The election seems black and white- markets favour Clinton, a known quantity, experienced and a safe pair of hands. Trump is the opposite – a Trump Presidency should however be constrained by the Senate and House of Representatives and it’s assumed his more extreme policies will go know where. However the market reaction is most likely to be negative, although a flight to quality could see US Treasuries perform well.
The economy is slowing down – with GDP growth notably weaker than 12m ago. And whilst the Federal Reserve is anxious to raise interest rates, to a level from which they can stimulate the economy in the future, the way GDP is going makes any rate hike a token gesture. Finally the valuation of the market is high.
Of these issues the election is critical – a Clinton win should mean BAU – a Trump win could see these issues feed off each other, and the whole world will get swept along. Opportunity? Sovereign bonds yields could go lower.
Peter Lowman, CIO, Investment Quorum
Clearly the second longest equity bull market in financial history, of which, the US has led the way, is now prompting questions regarding the levels seen on Wall Street versus US company valuations, and perhaps more importantly, future guidance in respect to corporate earnings.
Understandably, global asset allocators, and investors, have been reducing their exposure towards the US market, locking in some gains, in favour of other regions such as the emerging markets where valuations and yields look more attractive, and regions of Asia, where the growth expectations look more appealing.
Other issues of contention of course surrounds the forthcoming US presidential election where the Trump campaign recently gained some support over Hilary Clinton before retreating on his poor performance in the first debate.
In our opinion, once the US election result is known, and more importantly, what the Fed might do in respect to US interest rates, and the direction for crude oil prices, we might have a much better idea as to the path that bond and equity markets will take as we enter 2017.
Mike Deverell, investment manager, Equilibrium Asset management
Whichever way you look at it, the US market looks quite expensive. For example, according to Thomson Reuters the historic price/earnings (PE) ratio on the total US market is well over 21 times earnings. The long-term average is somewhere around 16, so the PE is around a third above its historical average.
Bulls can make a great case to justify this valuation, pointing to low rates and bond yields. Whilst this could change if the Fed goes through on threats to increase rates, even they are saying that long run rates are likely to be lower than they had previously thought. The market has also looked expensive for some time now but has continued to power ahead.
However, this sort of valuation can only really be justified if there is decent earnings growth. Unfortunately, over the past year earnings have been at best flat. Recent economic data has been no better than ok, and so it is difficult to see strong profit growth in the next year.
However, we also have the small matter of the election. A Trump victory would not be viewed kindly by markets. We are cautious about the US and are underweight in our portfolios.
James Calder, head of research, City Asset Management
Love or hate the candidates, this year’s US Presidential election is the most polarising of a generation. Markets fear uncertainty and which candidate is likely to be worse is hard to gauge, but market turbulence should be limited to the weeks after the result. Both candidates have put forward fiscal expansionary plans, which are welcome in an economy that has limited growth, although relative to the rest of the developed markets it is positively booming. I do have concerns over both as each has raised the likelihood of protectionist policies, however Mrs Clinton has already made negative noises towards big pharma, although this may well be in the price.
Whilst the US equity market is expensive on a trailing PE basis it is the only large developed market where there is confidence on positive GDP growth, wage inflation and to be frank is the only economy where the interest rate tightening cycle has begun. We now debate as to when the rate rises will occur as opposed to if they occur. On a relative value basis there is merit to US equities, in fact one could argue that it is the only sure fired game in town.
John Redwood, chief global strategist, Charles Stanley
There are two worries that investors have about the US for the rest of this year and into 2017. The first is will the Fed raise interest rates? There are fears the economy cannot take such action, allied to the likelihood that the dollar will go up more, making international business more difficult for US companies. We think the Fed is likely to keep rates lower for longer. It would be unusual to have a hike in an election year.
The second is what might happen with a change of President. Many investors have not liked some of Donald Trump’s rhetoric. They would be likely to mark shares down if he wins. Hillary Clinton will introduce some higher taxes and more regulations on rich individuals and companies, though she is the preferred candidate of many in the markets. There could be some turbulence over the period of the election.
UK investors have probably had the best of the currency gains. There may be better buying opportunities ahead for anyone wishing to have a longer-term exposure to US companies.
Russ Mould, investment director, AJ Bell
It would be unwise to get too hung up on the Presidential election result, for two reasons.
First, the new President will have to work with the House of Representatives and the Senate, which could easily block any new policies – remember that HoR Speaker Paul Ryan does not share many of Trump’s views, even if they ostensibly come from the same party.
Second, stocks and bonds are long-term investments and even a two-term President will only be in charge for eight years – not a long time in the life of a company. So while there is scope for certain sectors to be volatile – healthcare is one – the potential impact of Presidential policy must again be kept in perspective even if the Dow Jones has historically done better, on average, in the first year of Democrat President than a Republican one.
The US Federal Reserve is likely exercise just as much if not more influence over asset prices than the President, judging by the wild swings in many asset classes after last December’s initial 0.25 per cent hike. Interest rate increases will come very gradually – if they come at all – but the US stock market tends to do less well when the Fed is tightening than when it is loosening.
US equity valuations look toppy relative to most historic norms, using tried-and-tested methods like market cap-to-GDP, though they look fine relative to what could be vey expensive bonds and the US economy is probably doing less badly than many of its developed market peers. That should provide some support but US corporate earnings momentum has been weak, so this needs to improve (and fast) if the S&P 500 index is to kick on in 2017 and beyond.