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Haven’t bothered with a smart meter yet? JUPITER ECOLOGY: Blue sky and wacky? Trump, Europe elections, Japan recovery and China growthwhere should you invest in 2017? Read this: Trump, Europe elections, Japan recovery and China growthwhere should you invest in 2017? The election of Donald Trump as next US president and his stimulus plan for the world’s biggest economy dominate all discussion of investment prospects for this year. Whether his package of infrastructure projects and tax cuts gets off the ground or proves effective will have an impact well beyond America’s shores, since the US remains the biggest engine of world growth. Meanwhile, Trump’s threats of a trade war with China, talk of overturning US foreign policy on Russia, the Middle East and Taiwan, and criticism of the NATO defence alliance, could destabilise the world economy as well as upset international relations.
Trump has excited the most comment among investment pundits this year, but we also round up their views on Europe, Japan and emerging markets and run down some fund tips below. How do government bond markets work? The election of Trump on a platform that includes aggressive tax cuts, massive infrastructure investment, actions to repatriate jobs and profits to the US and an easing of banking regulations has prompted a rapid reassessment in the outlook for both US growth and inflation,’ says Jason Hollands, managing director of Tilney Bestinvest. Markets have habit of lurching between fear and exuberance and right now hope is firmly back in the ascendancy. But he went on: ‘The extent to which the Trump agenda comes into fruition is however unclear at this stage. Although the Republican Party controls both the US Senate and Congress, many House Republicans will be reluctant to countenance allowing the US deficit to escalate significantly. Even on the assumption that in the medium term, Trump’s policies are successful in accelerating economic growth and in turn corporate profitability, the latter is arguably needed to justify current valuations which are already stretched by historic standards.
Gavin Haynes, managing director of Whitechurch Securities, says: ‘The radical change in the political backdrop in the US is naturally at the forefront of investors’ minds going into 2017 and the consensus that has emerged is that the advent of Trumponomics will stimulate growth in the economy and be positive for stock market investors. But he cautions: ‘The chasm between pre-election promises and what is delivered tends to be wide and the political process of implementing a change in direction of economic policy is likely to be more protracted than Trump or investment markets expect. At the same time the US stock market hit new highs in 2016 and valuations look expensive in historical terms and relative to other markets, and are pricing in a positive scenario. The strength of the dollar could prove a headwind for exporting US businesses, who would also suffer from retaliation if Trump implements protectionist trade policies. The potential for further interest rate rises in 2017 could also be a negative, with yields on US Government bonds having exceeded the yield on the US stock market towards the end of 2016. Adrian Lowcock, investment director at Architas, says: ‘Stock markets have become rather euphoric.
Good liquidity and lots of cash has meant that markets have priced in the best possible scenario. Valuations in the US are high which has been justified by rock bottom interest rates, but as rates move up this valuation premium will diminish. Many of Trump’s policies would be positive for the US economy and stock markets, but there are risks not factored into valuations. Lower taxes will boost company profits and household incomes more quickly but has arguably been priced into markets, while fiscal spending plans are only blueprints at the moment and may be tempered by a budget conscious Republican party. At the moment investors are not climbing a wall of fear but one of optimism. We expect US growth to pick up towards the end of the year but investors might experience a bumpy road if we see a Trump slump. Bruce Stout, manager of the Murray International investment trust, says: ‘Donald Trump has campaigned on a commitment to spend more on infrastructure, supported by a higher fiscal deficit, and to champion protectionist policies that will likely curb trade.
If he does what he says he will do, this is clearly bad for emerging markets, especially Latin America which sends a bigger proportion of total exports to the US than any other developing region. There is some thought that Trump may tone down his rhetoric now that he’s secured the prize. While that remains to be seen, having control of both Congress and the Senate could prevent the gridlock we’ve seen over the past six years with President Obama. Colonial Investment Trust, says: ‘Investors seem to be focused on Trump’s promise to cut corporate taxes and boost spending and appear to be assuming a pickup in growth, inflation and interest rates.
There is a clear risk that the market is getting ahead of itself in terms of how much Trump will, ultimately, deliver. The European economy is likely to remain sluggish, with little inflation, says Carlos Moreno, manager of the CF Miton European Opportunities fund. As in the US the working age population is falling and productivity growth is on a long term down trend. Credit demand is weak and investment levels are low.