Trump’s plans to cut taxes and boost spending have sent Wall Street to record highs in December as investors pile into everything from banks, to energy and materials and other infrastructure-related names.
The last Reuters asset allocation poll of 2016 surveyed 45 fund managers and chief investment officers in mainland Europe, the United States, Britain and Japan.
It showed equity holdings at 45.3 percent, the highest since June, capping an eventful year that saw a significant worldwide lurch towards populist, anti-establishment political movements but also signs of economic recovery – from the United States to emerging markets.
Possibly the biggest upset was the Nov. 8 U.S. presidential election win for tycoon Donald Trump, whose economic and trade policies will shape next year’s investment landscape.
“Trumponomics will be a key factor to watch in 2017,” said Matteo Germano, global head of multi-asset investments at Pioneer Investments.
“If his proposed infrastructure spending, fiscal easing and tax reforms are effectively implemented, the U.S. reflation stimulus will likely strengthen GDP growth, inflation and earnings growth.”
While failure to deliver this may trigger volatility, investors reckon that will throw up opportunities for canny stock-pickers.
“Be ready to buy dips,” said Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM). He argued that the surge in populism that had dominated the political and economic landscape in 2016 would continue to exert its “erratic influence” in 2017, and he expected volatility to rise generally.
“This will create good opportunities to buy stocks, but it would make sense to trim exposure when things appear too good to be true,” he said.
The poll showed cash holdings dropping more than one percentage point to 5.4 percent, the lowest since February, reflecting growing confidence that the rally triggered by Trump’s election win still had legs.
As well as the energy and infrastructure-related names that may benefit directly from “Trumponomics”, poll participants also saw opportunities in commodities, beaten-down European banks, defense, technology and value stocks in 2017.
The poll was carried out from Dec. 15 to 21, immediately after the U.S. Federal Reserve’s December meeting at which it raised interest rates and signaled it could hike them three times in 2017, once more than previously expected.
Some participants worried about the potential fallout – reflected in cuts to emerging market equities and bonds – but the overall mood was positive, with U.S. equity exposure raised to 41 percent, the highest since September, and UK stocks raised to 11.3 percent, the highest since July.
Whilst investors acknowledged that equities did not look cheap, some managers argued that they still offered better value than bonds, and were likely to continue to do well as growth accelerated in 2017.
Some, such as Ryan Boothroyd, an analyst with the multi-asset team at Henderson Global Investors, argued that Japanese and euro zone equities were better ways to play U.S. domestic strength than the more crowded U.S. trades.
The overall allocation to bonds was steady at 40.8 percent, with several managers saying inflation-linked bonds offered good value, especially considering the recent rise in oil prices.
“We also like EU inflation-linked securities, as they discount a very pessimistic inflation scenario in the Eurozone,” said Pioneer’s Germano.
DOLLAR STRENGTH
Even though the dollar has raced to 14-year highs against a basket of currencies in the wake of the Fed meeting, only a slim majority – 52 percent of poll participants who expressed a view – thought the euro/dollar exchange rate would break below parity in 2017.
Parity was last hit in 2002. Launched in 1999 at $1.1747 the euro is currently trading around $1.0430.
Several said any fall below parity would be short-lived – for instance, Jan Bopp, an asset allocation strategist at Bank J Safra Sarasin, saw further euro weakness offset by inflows into European equities, which remain cheap relative to U.S. peers.
And Henderson’s Boothroyd said: “Towards mid-year we believe that there is scope for a weaker dollar and stronger euro as some of the European political risks fade, talk of the ECB taper returns to markets and Trump’s policy program gains greater scrutiny.”
Another significant 2016 political shock was Britain’s June 23 vote to leave the European Union. The outcome has sent sterling plunging around 16 percent against the dollar year-to-date.
But around 60 percent of those who answered a special question on the subject thought the worst was over for the British currency.
Raphael Gallardo, a strategist at Natixis Asset Management, argued sterling’s fall had boosted the UK economy’s competitiveness, while the loss of market access to the European Union would not materialize until 2019-20.
“Markets over-reacted to the prospect of Brexit,” he said.
(Additional reporting by Maria Pia Quaglia Regondi and Hari Kishan; Editing by Hugh Lawson)
