US: the Trump Effect
LGIM also questions whether the US economy would overheat in the wake of Trump assuming power and the potential effect on taxes and spending, where the numbers are potentially large.
“The timing of this stimulus could hardly be worse,” Drayson said. “In our view, the US economy is already close to full capacity and was set to grow above potential next year. Subject to overstimulation and accelerating Fed hikes, markets could be anticipating the next recession by end-2017.”
Meanwhile, Pictet’s Paolini observes that history suggests US presidential first terms have traditionally been the worst for equity markets.
He added: “Bad news for US equities includes tightening liquidity conditions, potential political upheaval and the return of wage inflation. The risk of protectionism is extremely difficult to price but even a low-intensity trade war stoked by the new US administration can do long-term damage to equities.”
That said, Paolini believes a move by the US administration to cut regulation and corporate taxes could offer further support to US equities. If all Trump’s mooted tax cuts were actually implemented, they could boost valuations by 7-10%, he added.
“However, US stocks are very expensive versus Japanese and European peers so further notable outperformance is unlikely.”
