Investment Report – January 2017 – Trump Trade Cool-off

OVERVIEW

January was a subdued month in the markets as ardor for the “Trump trade” cooled. Investors weighed up the possibilities that his new regime would bring. No doubt some of the easing in investment values was due to profit taking.

US equities started the year on the front foot, with the S&P500 index hitting record highs despite uncertainty over the transition to a new administration.

However, economists remain buoyant about future growth, with consensus estimates for 2.3% in both 2017 and 2018 based on an assumption that Trump would stimulate the US economy.

Investment clarity for UK investors is slowly improving. In January, the prime minister, Theresa May, gave a speech outlining her plans for Brexit negotiations and the Supreme Court ruled on the activation of Article 50. The FT100 share index weakened a little, dropping by 0.5%.

In Europe markets were also in the doldrums posting modest losses as investors contemplated the number of elections due in the region this year. Grexit was also back on agenda with Greece heading for bankruptcy again unless EU leaders could sort another bail out.

Markets in Asia were strong as the US$ weakened and the latest growth numbers posted in China were good.

Here in the UK commercial property enjoyed a good month with property managers reporting strong inflows of investor money. A major development in the City commenced which was a positive signal.

Fixed-interest securities, gilts and global bonds fell in value continuing a trend that started last Autumn.

Here is the chart of the FTSE 100 index for the last six months:

…and the last five years, which puts this into perspective;

FUND PERFORMANCE

Short-term Performance

Long-term Performance

(Source; Parmenion Capital Partners LLP)

PORTFOLIO REVIEW

All Portfolios

All portfolios gained in January despite a weak UK market.

Income Portfolio

The Income Portfolio increased by +0.5% out-performing the benchmark (the average mixed investment (20-60% shares) fund) which grew by +0.3%.

No changes were made to the portfolio this month.

Balanced Portfolio

The Balanced Portfolio grew by +0.5% in-line with the benchmark (the average mixed investment (40-80% shares) fund) which also grew by +0.5%.

No changes were made to the portfolio this month.

Tactical Portfolio

The Tactical Portfolio grew by +1.2% out-performing the benchmark (the average Flexible fund) which grew by +1.0%.

No changes were made to the portfolio this month.

OUTLOOK

Since the US presidential election result in early November, financial markets have been buoyed by the prospect of increased fiscal stimulus. On the campaign trail and in his acceptance speech, Trump discussed the prospect of corporate tax cuts, increased infrastructure spending and tax holidays for companies with overseas earnings. The prospect of increased fiscal stimulus has pushed up equity markets by 7% since the start of November.

This focus on the US economy has eclipsed all other issues and pushed markets higher round the globe. But have investors got too excited, too soon? There are two aspects to the potential changes to fiscal policy that investors should question: the scale and the timing.

First, the scale of fiscal stimulus is likely to be less than investors currently expect. Forecasts from the Committee for a Responsible Federal Budget estimate that President Trump’s proposed tax and spending plans would increase government debt to 105% of Gross Domestic Product (GDP), up from 77% in 2016. If these forecasts are accurate, it would push US government debt as a percentage of GDP to its highest level since the Second World War. Republican politicians are unlikely to sign-off on unfunded tax cuts meaning fiscal stimulus is likely to be much more limited than what was announced by Trump.

Passing legislation to reform taxation or increase infrastructure spending will take time and may not happen until the end of 2017. Furthermore, the focus of politicians seems to have shifted from fiscal stimulus to health care reform and trade renegotiation, meaning tax cuts and infrastructure projects may be bumped down the political agenda.

The odd thing is that the US economy remains in a strong position and does not need stimulus. It is for this reason that bond prices have reacted badly to Trump’s election; boosting an already strong economy will probably lead to inflation. This is bad for the bond markets and means that interest rates in the US could rise sooner rather than later.

Don’t forget the usual risk warning for all long-term investments: “The value of units can fall as well as rise, and past performance is no guarantee of future performance. The value of income payments from investment funds is not guaranteed and can fall as well as rise”.