Inflationary fears form the backdrop to good indicators for several markets and sectors, but there are robust defensive moves investors can be taking to mitigate the risks.
Investors retreat into cash.
US inflation and dollar movement hotly debated.
Doubts rage over “Santa rally.
Electric vehicles spark interest.
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Looking ahead to December, our expert investment views focus on the consequences of Donald Trump’s election and the opportunities created by the electronic vehicle evolution.
Chris Darbyshire, Chief Investment Officer at Seven Investment Management, says:
It was another blow for political analysts, pollsters and bookmakers when Trump won the US election. That he achieved this convincing victory using few traditional campaign tactics, and despite significant setbacks along the way, also suggests the underlying change in popular sentiment is great indeed. America voted for a businessman with no experience of politics or foreign policy, whose grand promises have little substance, but who was able to champion the common man more effectively than the Washington establishment.
Trump’s inauguration is on 20 January and, until then, he’ll be busy assigning 4,000 administration jobs. This should create an uneasy truce between Trump and the Republican establishment who will be recalculating their self-interests. Trump has an unexpectedly strong mandate: Republicans have won a clean sweep of the Presidency, House of Representatives and Senate. Some of his policies will therefore be enacted, although plans won’t be clear until his first 100 days of office. Republicans will feel duty-bound to support Trump during this honeymoon period.
Trump’s triumph seems to reinforce views that conventional politics is dead. Brexit, Geert Wilders, Italy’s Five Star Movement (founded by a stand-up comedian), Alternative für Deutschland and Austria’s Freedom Party are all examples of the growing desire for something radically different. They express the economic and political disadvantage arising from under-representation in national governments and the delegation of sovereignty to supranational organisations. How deep does this undercurrent run, and how concerned should investors be?
Chief Investment Officer at Seven Investment Management
Rosie Bullard, Portfolio Manager at James Hambro & Partners, says:
The American election outcome inevitably dominates investment thinking for most people.
On the basis that Trump can’t possibly finance all his promises – like a $1tn infrastructure programme at the same time as hefty tax cuts – the question is which will he actually follow through?
His agenda is expected to fuel inflation and could weaken the dollar. US treasuries have done well for us this year – a relatively low-risk way of getting dollar exposure – but with sterling looking like it’s reaching its bottom and with bonds selling off, we have taken some of the profits and repatriated the cash.
A little inflation can be healthy for companies – people don’t delay purchases if they know prices are rising. Coupled with a more business-friendly environment, this might encourage a preference for US equities over bonds, but investors should be selective.
Closer to home, elections in Europe next year could mean the political shocks keep coming, making us cautious there. The Autumn Statement and confirmation of a £122bn black hole in the public finances do nothing to make us want to reverse our underweight UK position.
That leaves emerging markets and Asia. Traditionally, these have been seen as higher-risk regions, but they may be the stabilisers and growth drivers for portfolios in the coming months.
It’s not surprising that many individual investors are retreating into cash; we’re overweight cash ourselves. Our priority at present is wealth preservation, but we also think there’ll be good opportunities ahead and we want to be able to exploit them.
Portfolio Manager at James Hambro & Partners
Garry White, Chief Investment Commentator at Charles Stanley, says:
Did Santa come early this year? The “Trump bump” seen in stock markets following the US presidential election reflects market hopes that the president-elect will introduce reflationary policies that are good for equity markets. But does the November surge mean that the oft-anticipated Santa Claus rally is now unlikely this year?
December is usually one of the better months on the stock market, but a rally in the festive month does not happen every year. In the UK, sterling weakness should be supportive, providing a “sweet spot” for equities and growth. However, a decline below $1.20 could be problematic for the wider UK economy. On Wall Street, the Federal Reserve is likely to increase interest rates at its December meeting, a move that is usually negative for equities. However, interest rates remain close to historic lows, so concern over any rise is likely to be overridden by growth hopes.
A rate rise is bullish for the US currency so the strengthening dollar could limit any rally, as multinational companies will face a headwind in international profits that could cap earnings. A strong dollar could also hurt exports. This implies that shares with a more domestic focus could rally strongly, as they will see little impact form a strong dollar.
So, despite there being risks to the downside from political events and currency markets, I think Santa will make an appearance in markets this December, adding to the recent gains seen after the US election. Many investors are sitting on cash and, with bonds looking unattractive for now, equities are likely to benefit.
Chief Investment Commentator at Charles Stanley
Ben Barringer, Executive Director and Equity Research Analyst at Quilter Cheviot, says:
By the end of 2016 there will be more than 2m electric cars on the world’s roads, according to recent estimates. The popularity of hybrid and electric cars remains on an upward trajectory; figures from the Society of Motor Manufacturers and Traders show that sales were up by 12.4% in October and by 23% year-to-date.
In the UK, a further boost has been given to the industry by the Chancellor of the Exchequer, who announced in the Autumn Statement that the government will invest £390m by 2020-21 to support ultra-low emission vehicles (ULEVs), along with renewable fuels, and connected and autonomous vehicles (CAVs). This investment includes £80m for ULEV charging infrastructure – meaning more electric car charging points across the UK. From the end of March 2019, the government will also offer 100% first-year allowances to companies investing in charge-points for electric vehicles.
Opportunities to invest in electric vehicles are opening up and include traditional auto and component manufacturers and companies such as Tesla, the US maker of purely electric cars. Of course, the electric car does have limitations when it comes to range, refuelling and affordability, but huge investment by the auto industry means these issues are being resolved. For example, the much-talked about TESLA Model 3, which won’t even go into full production until late 2017, has already received almost 400,000 pre-orders and is marketed as an “entry-level” electric vehicle, with a starting-price tag of US$35,000 (£24,400).
The future looks bright for electric vehicles, but it is early days and when it comes to investing this should be born in mind. With new entrants continuing to join this exciting new market, being able to identify those who will drive innovation, stay the distance and do so profitably is essential.
Executive Director and Equity Research Analyst at Quilter Cheviot
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
What an interesting world we live in. Change is ever present, but never more so than in the political sphere, where two of the most unexpected events have rocked our political and financial outlook, namely Brexit and Trump.
We’ve dealt with Brexit before so rather than go over old ground, I think focusing on the election of Donald Trump is important. Firstly, now that he is president elect, the tone towards him has changed. I suspect that is more down to the stature of his office than the man himself, but he himself has toned down some of his quite extreme pre-election rhetoric and looks to be mending fences.
I have read that the election of Ronald Reagan in 1981 elicited some similar worries. How could an actor be president, people thought? But by the end of his time in office the US was firing on nearly all cylinders and its place in the world as the true leader had been secured.
The US population might be looking for change, but they are not stupid. As they and the rest of the world get used to the idea of a Trump presidency, I believe we will see opportunity rather than anguish; the markets look like they don’t mind the idea either. The suspected decline in risk assets has not materialised, and the major US indices have gone on to make multi-year highs.
As I have often said, with interest rates low and remaining so for a good while longer it seems, where else is there to put your money? A good wealth manager will help you with this conundrum and we have plenty to choose from at findaWEALTHMANAGER.com. Arrange your free, no obligation consultation today and get professional insights into the investment opportunities that the current environment might present for you.
Co-Founder of findaWEALTHMANAGER.com
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
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