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By Roger Garrett, Senior Portfolio Manager, International
07 December, 2016
The wind of change is certainly blowing through the US share market following Donald Trump's presidential election victory.
While it is still difficult to draw firm conclusions given the vagueness of many of his policies, the market quickly seized on his intention to cut personal and business taxes, reduce bureaucracy and boost fiscal spending on infrastructure. These policies are interpreted as pro-growth and likely to cause inflation.
The response of the US share market was dramatic following the election. Investors embraced the new leadership with a massive rotation out of stocks that are perceived to suffer under Trump (e.g. technology and e-commerce businesses that seek to hire global talent and could be vulnerable to protectionist policies), and into previously underperforming sectors such as financial and industrial stocks.
Financials were the worst performing S&P sector through to October but their strong November performance (the best since 2011) is on the expectation that bank profitability will improve as interest rates rise and the difference between bank borrowing levels and bank lending levels increases therefore improving bank margins.
Industrial companies have naturally responded well to Trump's intention to invest in infrastructure which is expected to boost their earnings growth prospects.
Our portfolio was geared more towards quality companies that had secular growth drivers but higher valuations. These types of stocks have clearly been used to fund investment into newly-popular sectors that are expected to perform better in a higher growth environment.
Time will tell as to whether this market rotation will hold and benefit the 'hot' sectors as well or as quickly as the market is hoping. We continue to have high conviction in our long term growth stocks; any improvement in US economic growth and inflation will benefit our businesses. All boats will be lifted with a rising tide, but we do not intend to participate in sector-hopping in anticipation of Trump's policies. The President-elect's promises may not eventuate or they may be reworked; if the tide falls, we want to be sure we're in the right boats!
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