The idiosyncrasies that US president elect Donald Trump will create in markets by his individual dealings with companies will provide favourable conditions for active management, JP Morgan chief market strategist Stephanie Flanders says.
In particular, Flanders refers to the president-elect’s conversations, as detailed via his Twitter account, with individual companies whereby he takes credit for their strategic decisions.
In December, Trump boasted of keeping 1,000 US jobs at heating and air conditioning company Carrier in the country, which parent company United Technologies had previously planned to move to Mexico. He has threatened stiff tariffs on companies outsourcing production and importing products back to the US.
However, Fiat Chrysler has argued Trump’s claims that he influenced them to keep jobs in the US are untrue, while executives at Detroit’s annual motor show argued the industry was being unfairly singled out by the president elect.
Flanders says this will create opportunities for managers with a bottom up approach.
“At this stage in the cycle you’re not necessarily talking about really simple asset allocation choices or index level choices when it comes to countries performing or even sectors performing – particularly where you’ve got radical uncertainty that is even affecting individual companies,” Flanders says.
Instead of focussing on the outcome of contentious political outcomes in Europe markets may instead react to the latest company Trump is targeting, she said at JPMorgan’s quarterly market update.
“Then you’ve got a lot more idiosyncratic variance that you can have in market moves and performance of individual companies.”
“We’re all learning in this new environment so it’s not necessarily like fund managers are going to get a handle on that immediately, but already someone who’s going to be looking at a company level is going to be at a much better position than someone making sector or country level plays.”
Brexit is also good for active managers
Idiosyncrasies on both sides of the Atlantic could support active management, Flanders argues.
“It’s not just that we don’t know what kind of transition deal there’ll be or when exactly article 50 is going to be triggered. A lot of rules across the board are being torn up with very little indication about what is going to replace it.
“You can’t just talk about a deal for financial services. It’s what parts of financial services – is it investment banking, is it insurance. Everyone of those sectors could see idiosyncratic and unexpected implications from the twists and turns of the negotiations or the transition period.”
Flanders disagrees with predictions that the Bank of England will consider raising rates by the end of this year stating this year would be “crunch time” for consumers who would begin to feel the squeeze on real wages over the summer.
In a normal world, Flanders says the hit to consumers from the weak pound would be offset by exports coming back and improving investment expectations.
“It could be that we could see some export benefit in the faster growth in the eurozone and elsewhere, because that’s historically been the most important thing – not the level of the pound. At a time when we have such uncertainty about our future trading position it seems unlikely that companies would see these great export benefits.”
Markets ‘mesmerised’ by Eurozone politics
Flanders says while they are keeping on eye on political developments on the Continent, especially in France and Italy, an important lesson from 2016 it is difficult to predict the market response to politic shocks.
“You can get mesmerised by the politics from an investment standpoint.”
Flanders says it is worth noting underlying support for the euro is strong across countries, including Italy.
Eurozone large caps, alongside the FTSE 100, are the main areas JPMorgan expects to see a significant rise in returns over the next 10 years in comparison to the previous decade. However, Flanders notes this says more about their past than future performance.
In contrast, US large cap annual returns would approximately halve compared to the last 10 years.