This year’s U.S. election campaign was one of superlatives. Two of the most unpopular candidates competed in one of the most divisive contests ever. Record numbers of key demographic groups turned up to vote. And we have perhaps the most unorthodox winner of a U.S. presidential race in history.
Volatile trading in the past days has yet again demonstrated the importance of a long-term focus for investors. Trading equities at the wrong time today could have permanently impaired wealth. In our tactical asset allocation, we continue to believe that fundamentals should outweigh political risk.
We continue to overweight U.S. equities relative to government bonds. Fundamentals should outweigh political uncertainty, as private consumption remains solid and companies continue to benefit from easy financial conditions. We forecast corporate earnings per share growth to rise from 1 percent this year to 8 percent next.
We also maintain our overweight in emerging market equities, our underweight to international developed market equities via an underweight in Swiss stocks, and our preference for an emerging market currency basket. Key drivers include overall accommodative monetary policy and low yields in advanced economies, undemanding valuations in emerging market currencies, and some improvement of fundamentals in the developing world.
Should global financial market volatility rise further from here, we think a declining chance of a Fed December rate hike would help to limit the downside for emerging market currencies. Meanwhile, we will closely monitor policy announcements of the new U.S. administration, for indications of measures that could weigh on global trade and growth. We will also look for signs of shifting geopolitical relations between the U.S. and Russia.
We’d expect our overweight in U.S. Treasury Inflation Protected Securities relative to government bonds to benefit from the election result. Donald Trump’s platform has an inflationary bias: his fiscal policy is likely to be expansionary, and he leans toward protectionism, which is inflationary due to the effects of tariffs and curtailed immigration. Both trends should support inflation-linked bonds, therefore making them even more attractive than they would otherwise be.
Finally, we now prefer the euro relative to the U.S. dollar. The euro is around 12 percent undervalued relative to purchasing power parity based on our estimates. We believe there are indications that the Fed may be falling behind the curve in raising interest rates – wages are growing at the fastest pace in more than five years, and inflation stands at a two-year high.
These trends will potentially be exacerbated if the Fed allows for a more “high pressure” economy over an extended period. Meanwhile, economic fundamentals in the Eurozone continue to improve, and the European Central Bank remains likely to taper its quantitative easing program in 2017.
In the wake of the U.S. election result, we are also highlighting some additional investment ideas. One of them is buying U.S. financials and healthcare equities. With the Republican party in control of both the White House and Congress these sectors stand to benefit from lower regulatory risks. Financials could also get a boost if interest rates continue to move higher as the markets focus on the reflationary aspects of Trump’s likely policies. Within health care, pharmaceuticals stand to benefit from a lower risk of drug price controls, and from the repatriation of overseas cash.
Another idea is buying U.S. senior loans. Expected fiscal stimulus from a Trump presidency should be positive for U.S. economic growth, and boost U.S. inflation. Both factors may lead to a steepening in U.S. sovereign yield curves, which is a favorable development for floating-rate senior loans. The asset class has held its ground even through recent market turbulence, losing just 0.2 percent in the last bout of volatility. And specific loan issuers, especially in the energy and financial services sectors, may benefit from less stringent regulation.
A third idea is buying cybersecurity stocks. We expect the industry to get a further boost under Trump’s presidency as he has repeatedly vowed to strengthen the cyber security infrastructure of both the U.S. government and corporates. The cyber security allocation in the U.S. federal budget has already increased from $12.6 billion in fiscal year 2015 to $19 billion in fiscal year 2017. But we expect the broad-based momentum to continue, as we envisage tighter security regulations in the future.
A fourth idea is buying platinum and palladium. Gold acted as a hedge in the immediate aftermath of a Trump victory, rallying 4.7 percent. We like platinum and palladium which stand to gain from safe-haven flows related to any future concerns around U.S. policy or the Italian referendum, but are also supported by rising auto sales and industrial production.