In the last of a special three-part Big Question, fund managers give their views on what Donald Trump's presidency may mean for markets and the global economy.
Click here for part one and here for part two
Trevor Greetham, head of multi-asset at Royal London Asset Management
Animal spirits
Equity markets have certainly been frothy lately, with our investor sentiment indicator in or close to euphoric territory since Donald Trump won the election. However, while it pays to be greedy when others are fearful, our analysis doesn't support taking a negative view simply because others are positive. Markets can melt up for months at a time when economic activity is accelerating as it is now. Against this backdrop a correction would be a chance to buy not to sell.
Trump has certainly unleashed animal spirits with his promise of corporate tax cuts and fiscal stimulus but it is worth remembering that a recovery was already under way. Trump comes into office in 2017 with unemployment low, the US stock market at a record high and interest rates starting to rise.
Obama started out in 2009 just after the Lehman failure with unemployment double its current level and stock markets on their knees. History will judge who leaves America in a greater state than that in which they found it.
Nandini Ramakrishnan, global market strategist at JPMorgan Asset Management
Value stocks on the up
Trump's rhetoric has signalled a pro-growth, America-first approach during his presidency. Accordingly, it has swiftly jolted markets into a reflationary mindset while accelerating a rise in Treasury yields.
Despite economic indicators showing signs of improvement and Trumponomics looking set to prop up growth and thus act as a near-term positive for the US economy, on a global basis, this extra stimulus for the US will be happening in a country that has a notably tight labour market and has already seen positive growth.
As a result, the risk is that any short-term boost to growth will come with a shortening of the economic cycle and may therefore bring the date of the next US recession somewhat closer.
We expect moderately positive returns for US equities, with the exact magnitude and relative sector performance being driven by the extent of the stimulus and the reaction of bond yields along with the US dollar.
US value stocks have already outperformed growth stocks as the 10-year Treasury yield has rallied since November. We expect this, as well as US financials outperformance, to continue as the yield curve rises.
Keith Haydon, chief investment officer at Man FRM
Confidence momentum being built
We believe the eventual impact of Trump's policies is much too multi-faceted to be understood in advance, and the confidence with which markets have embraced the fiscal inflationary narrative leaves plenty of room for concern.
This rally may push valuations, with the 'P' of price outpacing the realized 'E' of earnings in the traditional P/E method of market valuation. But we believe this relationship will revert to lower than current levels with a force that continues to grow as the current rally stretches on.
Justifying the multiple in the last leg of a bull market is the venerable game being played out now in our view.
That said, there is momentum building in many of the confidence indicators and this kind of positive sentiment is helping to bridge the gap between current expectations and future implementation of economic policy.
Lars Kreckel, global equity strategist - asset allocation at Legal & General Investment Management
'Good Trump' or 'Bad Trump'?
Investors have largely been too optimistic about the impact of a Trump presidency. Markets have so far focused on 'Good Trump', who evolves from the divisive campaigner Trump to a more thoughtful President Trump, emphasising large fiscal stimulus, broad deregulation and business-friendly tax cuts.
This has been reflected in higher equity prices and bond yields and outperformance of highly regulated banks and domestically-focused small caps. Judging by the loss of positive price momentum in many of these Trump trades, it would take validation of the raised expectations to see another leg of the Trump rally.
Lost in the market debate seem to be the risks of 'Bad Trump', who is divisive, isolationist and anti-free trade and whose ill-advised comments can trigger geo-political tensions and crises. After the rally, the risk now seems skewed toward disappointments.
While the positives are clear and transparent, the risks are more nebulous and will take time to materialise. The focus will soon turn to implementation of policy, which typically turns out to be more difficult than the initial promise.
Click here for parts one and two
