As the world waits to see what the newly minted president of the United States of America will do next, Pictet Asset Management's head of multi-asset Percival Stanion looks at what pension schemes should be keeping in mind.
Investors have focused on plans for generous tax cuts and infrastructure spending, conveniently overlooking the potentially negative slogans from the presidential campaign – tariff barriers, immigration control and a more isolationist foreign policy.
The possibility of a US economic boom is now a non-trivial prospect. But we should remember that an awful lot can go wrong
For the time being – until we see more evidence of the Trump regime in action – we are content to support the benign market view. This is partly because we recognise the immense barriers to any radical policy shifts arising from the division of power within the US constitution.
Given the limited budget of political capital available to the Trump administration, there are probably only so many things it can achieve. The switch towards more fiscal stimulus seems most likely, accompanied and counterbalanced by tighter monetary policy.
The main tenets of the Trump economic platform should add momentum to an already strong economy, lifting both the real growth rate and inflationary pressures.
Indeed, the possibility of a US economic boom, which would have been easily dismissed just a few months ago, is now a non-trivial prospect. Markets are also now even more certain that the Fed will continue to raise interest rates next year.
But we should remember that an awful lot can go wrong. Controversial or unpopular candidates for the cabinet, Supreme Court, or even vacant Federal Reserve Board positions could become bogged down in Congressional trench warfare and undermine cohesion on the few areas where it exists.
Trump’s election has also put the spotlight on the various elections due in 2017 across Europe, where the populist surge is also gathering momentum. In emerging markets, meanwhile, the key focus is now on what happens to global trade and to the US dollar exchange rate.
What does it mean for pension fund portfolios?
Over the long run, the mix of higher inflation, tighter monetary policy and greater fiscal spending is clearly negative for bonds. However in the short-term – the next three months or so – treasuries should hold up relatively well following the very sharp rise in long-term bond yields, which in some cases has reached 100 basis points.
For schemes looking to secure new income streams, US high-yield bonds could be a good option. Here the arguments are long term, running deeper than the recent improvement in valuations. A stronger US economy would likely mean lower defaults, and the pro-energy stance of the Trump administration would certainly help that sector.
In equities, the higher US economic growth will likely help lift earnings expectations around the world, with scope for double-digit rates of growth in global profits. But much of this could be offset by rising discount rates lowering the valuation of those earnings.
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Owning the right equities could well be the critical decision. Cyclically sensitive sectors should do well, with industrial and construction companies in particular reaping the benefits of Trump’s promised infrastructure boom. More defensive, dividend-paying stocks such as consumer staples or utilities, on the other hand, could be in for a tougher time.
In currencies, the US dollar looks overvalued and overbought short term, but the direction of interest rate differentials is still supportive.
The current climate also calls for some protection, and gold remains our long-shot portfolio diversifier in the event of an inflationary blow-off.
Percival Stanion is head of multi-asset at Pictet Asset Management
