US small and mid-cap equities will be the ones to follow, in the age of Trump
His promises to lower taxes, reduce regulation on businesses and pump money into infrastructure projects brings a bright start for equity investors in 2017
Now the Donald Trump presidency is a reality, it does seem to argue for investments in more US-centric parts of the market.
At Schroders we believe he will achieve many of his goals, but they seem to be close to fully priced in. Wall Street tends to get ahead of itself at times, and this appears to be one of those times. While Trump’s hostility to foreign trade agreements is troubling, his policies do seem to offer some investment possibilities.
Thanks to the “Trump Rally”, US equities were the best place to be in 2016. They surged post-election, driven up by the three B’s: banks, building (infrastructure-related stocks) and (anticipated tax) breaks.
There seems to be a general belief that Trump’s policies will be positive for GDP growth. His promises to lower taxes, reduce regulation on businesses and pump money into infrastructure projects brings a fresh start for equity investors in 2017.
So a Trump presidency augurs well for investments in more US-centric parts of the market. The post-election US stock rally has driven up biotech, pharmaceuticals and infrastructure stocks.
Again, this may be good in the medium term. However, there are caveats. Caveat number one is: things take longer than you think. The new president will need to assemble coalitions in Congress to achieve his growth-oriented goals. This leads to caveat number two: things are often harder than you think.
We believe he will achieve many of his goals, but Wall Street seems to have already taken this into account in its pricing. Additionally, these boosting measures could take anywhere from nine to 18 months to accomplish. That leaves a lot of room for disappointment.
Healthcare (beyond pharmaceuticals) seems to be particularly problematic. Repealing the Affordable Care Act (otherwise known as Obamacare) without a replacement seems both difficult and politically untenable.
Approximately 20 million people have gained health insurance through the act; taking that away without another programme replacement seems unwise. How this will work out in practice is a big unanswered question that could take some time to gain clarity.
We believe he will need some Democratic votes in Congress to achieve meaningful change in this area, which could prove difficult.
While hopeful these changes will come into effect in early 2017, it’s more realistic that decreased tax rates kick in closer to 2018. In this environment, we see significant growth opportunities with small caps taking shape this year.
With Trump’s hostility to foreign trade agreements, our US small and mid-cap strategy will lean towards investments in more US-centric parts of the market. Small and mid-cap companies are much less dependent on foreign earnings, and therefore we are focusing on businesses that generate the majority of their revenue from within the US.
An area of particular interest to us is the US housing market, where we remain confident about the primary and secondary effects from a strengthening housing sector.
Demand for multifamily housing relative to single-family housing has peaked since its highs in 2011. Now, older millennials, with more stable incomes and growing families, are driving the interest in single-family homes.
This housing trend will likely boost purchasing for a wide variety of products and services, from heating and air-conditioning systems, doors, and windows, home appliances, to mortgage and property insurance services.
In investing in the US small and mid-caps, we can segment companies into three categories: mispriced growth, steady-eddies, and turnarounds, and see more opportunities in the former two.
In particular, we expect better opportunities in the first two categories.
Mispriced growth stocks are expected to be among the best performers, with the biggest gains to be realised from this group, with rises range from 12 to 18 per cent. Steady-eddies we consider to be stocks with more moderate and stable growth, ranging from five to eight per cent.
But the message seems to be clear: 2017 is a good year to consider weighing your portfolio towards the smaller US equities. The Trump effect continues to boost markets, and if anticipated stimulus plans come to fruition, these will be areas most likely to benefit from enhanced domestic opportunities.
Jenny Jones is the head of US small and mid cap equities for Schroders, a global wealth and asset management firm