A year on from US elections, is the US a good investment?

On 9 November 2016 Donald Trump was elected the 45th president of the US - an event that has changed the face of politics across the country. Darius McDermott, managing director of Chelsea Financial Services, considers the impact the new president has had on the US.

A year on from US elections, is the US a good investment?

We’ve spent the past 12 months, since Donald Trump’s election, reading 140 character policies, thanking our lucky stars that our average job tenure is 8.5 years1 (rather than a day for certain senior White House press aides), and watching the Dow Jones and S&P 500 rise ever higher.

One year on since the businessman and reality TV star was awarded one of the most important jobs in the world, how have things changed?

If we go back to the start of Trump’s presidential journey, many of you will remember that his victory speech sparked a significant rally in value stocks. Investors piled into companies with exposure to the domestic economy, known as cyclicals. Their expectation was that the US would experience a significant uptick in economic growth, driven by Trump’s plans to cut taxes and ramp up infrastructure spend.

This caused defensive stocks, called ‘bond proxies’, to fall in line with government bond prices. Higher growth was expected to result in rising interest rates and inflation – two factors that erode the fixed income stream that government bonds provide.

By the start of 2017, the so-called ‘Trump trade’ started to falter, causing investors to move back into growth stocks. Since then, the president’s track record has been disappointing. He has failed to replace President Barack Obama’s Affordable Care Act, and his grand infrastructure plan no longer amounts to $1 trillion of federal investment, as was suggested on the campaign trail. It has been scaled back to $200 billion over 10 years.

All eyes are now on Trump’s tax reform proposals, which have already faced numerous delays. If he is able to deliver on his ambitious plan, which includes lowering the corporate tax rate to 20%, it could provide a boost to many US businesses.

The US economy has continued to perform well since Trump came to power, although it hasn’t shot the lights out as many first anticipated. During the third quarter, the US economy grew 3% – in spite of disruptions to economic activity caused by hurricanes. Unemployment figures remain low, while business and consumer confidence has improved. Corporate earnings also continue to come through, particularly from mega-caps like Facebook, Amazon and Apple.

Encouraged by these positive dynamics, the Federal Reserve has raised interest rates over the course of 2017.

Although many of Trump’s promises are yet to be fulfilled, little has been able to stall the US stock market. For any investor who is considering US equities right now, valuation represents a big challenge. No matter what measure you use, the US market looks expensive.

On the other hand, some commentators suggest it could be driven higher still by underlying earnings growth. Something tells me that high quality businesses could be buoyed by a broad pick-up in global growth and a potential cut to the corporate tax rate.

Finding active fund managers who are able to beat the US market over the long-term has always proved tricky, but fortunately FundCalibre has identified a number with excellent long-term track records.

The next step is to think about whether you wish to back a US fund manager with a growth or value bias. Given that growth has had a strong run in recent times, we could see a rebound in value stocks over the coming years. Nevertheless, it is never a good idea to put all of your eggs in one basket so I would suggest holding a combination of the two investment styles.

For investors seeking exposure to small and medium-sized businesses, I would highlight Hermes US SMID Equity. Manager Mark Sherlock looks for quality businesses, which operate in industries with barriers to entry. He has built an enviable track record over the past five years, with a 139.3% return. This compares to 130% by the Investment Association’s (IA) North American Smaller Companies sector2.

This allocation could be complemented with Brown Advisory US Flexible Equity. Manager R. Hutchings Vernon seeks out undervalued medium to large companies with decent growth prospects. Since the fund launched in March 2014, it has returned 74.3%, which compares to 68.7% by the IA’s North America sector average3.

Tax reform, the future of Nafta and rising geopolitical tensions with North Korea represent just a few of the question marks hovering over Trump’s presidency as he embarks on his second year. I am sure there will be many twists and turns during the years ahead.

 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

 

1 Source: https://stats.ukdataservice.ac.uk/Index.aspx?DataSetCode=TENURE_AVE#

2 Source: FE Analytics, total returns in sterling, 1 November 2012 to 1 November 2017

3 Source: FE Analytics, total returns in sterling, 7 March 2014 to 1 November 2017

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