If 2016 taught investors anything it was that the market’s response to macroeconomic events is unpredictable at best. History tells us Donald Trump’s election and the Brexit vote should have derailed markets, but they proved remarkably resilient.
In a similar spirit, a reflationary environment might be thought to favour equities but Sheldon MacDonald, deputy chief investment officer at Architas and manager of the group’s Blended range, thinks this may not be the case.
MacDonald is a believer in the reflation trade. He says: “We accept the general wisdom that the world is becoming a better place and inflation expectations are improving. While people are laying that at Trump’s door, the underlying conditions were there already in the form of stronger growth and lower unemployment.”
However, MacDonald does not share the prevailing wisdom that this will be good for equities. He says: “Valuations are certainly not cheap. They look reasonable relative to bonds but not on an absolute level, and the level of uncertainty gives us pause for thought. There is uncertainty in the US over Trump and what he will do.
“We want funds with high conviction, not closet trackers."
“In Europe, populism is gaining traction: Marine Le Pen is looking a lot more electable. We also don’t know what shape or form Brexit will take. There are also uncertainties on corporate earnings. Valuations are currently discounting higher earnings and we need to see them start to come through.”
Ever the pragmatist
This means the Architas portfolios are underweight equities in general, and particularly in politically vulnerable areas such as the UK and Europe. This is in spite of some improving economic signs. The group sees better value in emerging markets and Asia, which lurched lower after Trump’s election in anticipation of anti-globalisation policies.
Certainly, president Trump has not toned down the rhetoric of his campaign since being in office but investors are realising there are limits to the damage he can do.
The US’s supply chains with Asia are complex and there is no evidence they can be replicated domestically in the US. MacDonald believes that, in the end, the global recovery will prove more important, benefiting these countries to a greater extent than Trump’s policies cause problems.
The recovering oil price should also be beneficial for exporters, while market valuations are still priced attractively, with potential for growth.
Having said that, where the Architas portfolios are invested in equities, MacDonald prefers funds with a value tilt. This is for pragmatic reasons: if there is a pullback in markets, valuation discipline is needed.