Trump’s spending pledges will disappoint, say investors

Investment heads at APG, Credit Suisse and DBS voice doubts about the sustainability of the US stock rally, with American equities now widely viewed as overvalued.
Trump’s spending pledges will disappoint, say investors

Investors are increasingly doubtful that US president Donald Trump will make good on certain spending promises, fuelling expectations that the country’s stock market is set for a fall.

A key pillar of Trump’s fiscal pledges is a public-spending plan focusing on infrastructure. Ronald Wuijster, CIO of Dutch pension fund manager APG, questioned whether this would materialise. And, even if it does, he suggested America’s other sluggish fundamental drivers could mute its impact.

“There’s not much fiscal spending in the US yet,” noted Wuijster. “[If it comes,] it may have an affect, but there are many factors on the other side, including high levels of debt and sufficient labour supply. I don’t see it leading to high inflation numbers.”

Michael Levin, Asia-Pacific head of asset management at Credit Suisse, was similarly pessimistic.

The day before the US election in November, market indicators implied disaster for equities if Trump won, he told AsianInvestor. Then, after “a few niceties and comments about infrastructure in his acceptance speech”, sentiment reversed.

“All of a sudden, there was a consensus view about that the economic support of tax cuts and fiscal stimulus that would drive equity valuations higher.

Michael Levin

“I’m not sure this is justified, especially given that the effect of these measures will potentially be offset by the Fed’s rate hikes,” said Levin. "What positive impact there will be has already been priced in; markets are likely to be disappointed.”

Policies such as tax cuts and defence and infrastructure spending are unlikely to meet expectations, so will therefore have a negative impact on equity prices, he said. The same is true of the rise in interest rates, which are designed to slow the economy, he added.

Add in the strong dollar and the impact of protectionist policies, noted Levin, and Trump’s impact on US stocks is likely to be negative in the medium term.

Frank Lee, acting CIO at DBS Bank in Hong Kong, is also worried about the prospects for US equities later this year.

“We are confident about developed-world equity markets in the first half of 2017, but more cautious about the second half,” he noted. He cited as reasons for this the high valuations of developed-market stocks and doubts about the launch of Trump’s policies.

Asset managers seem to agree. Eight in 10 (83%) believe US stocks are overvalued, according to the latest Bank of America Merrill Lynch monthly fund manager survey, published on Wednesday. It also showed that allocations were shifting, with big moves to emerging markets and Europe.

Emerging markets attracted a net $28.6 billion of capital in the first quarter of 2017, a sharp improvement on the $238 billion that was pulled out in the last three months of 2016, according to NN Investment Partners. In fact, EM flows turned positive in Q1 this year for the first time since the second quarter of 2014, said NNIP.

China-US relations

Meanwhile, this month’s Florida summit between Trump and his Chinese counterpart Xi Jinping was the first meeting of the two superpowers since Trump took office. But it has done little to dispel investors’ concerns about the potential impact of mooted American protectionist trade policies on either the US economy or EM assets.

The main problem is Trump’s plan to relocate to the US the production line and value-added process through the use of tax cuts and/or trade restrictions, said Lee.

Emerging markets’ share of low-end products, such as consumer staples, is ultimately safe, given their low labour costs and abundant natural resources, he noted. But their high-end manufacturing businesses – such as for IT devices and electronic subcomponents – will suffer, he said.

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