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Market View

Will 'Trumponomics' change the global economic landscape?

A monthly market outlook from Sanlam

 

The past year has been marked by political showdowns. When the unthinkable became reality, and political debate and divide pervaded living rooms throughout the world. Even the Oxford English Dictionary couldn’t keep up, being forced to introduce new words such as alt-right, post-truth and Brexiteer just to try and make sense of it all.

Another new term that will soon be rolling off the tongues of investors (if not already), is ‘Trumponomics’. A word that will likely come to symbolise pro-growth, pro-business policy.

How ‘Trumponomics’ will play out for the US and global economy is yet to be seen, but markets have reacted reasonably positively in the short term. Where Donald Trump’s policies align with Republican policy (such as tax cuts and deregulation within the financial services sector), it’s likely they will quickly become reality. It is hoped that this in turn will boost business confidence, resulting in innovation, investment and ultimately growth. That said, there could be issues with funding Trump’s plans, and the realities of implementing some of the pre-election talk on trade could derail the “Trump Rally”.

In the recent Autumn Statement, the UK Government took a similar pro-growth stance, officially abandoning austerity. Their intention to invest heavily in infrastructure across the UK (particularly that which enables innovation), as well as capping welfare spending, shows their commitment to improve GDP over the longer term and address the UK’s productivity problem. In the short term though, that means greater government spending and therefore borrowing, meaning the government is effectively betting on the old adage that you have to speculate (borrow more money) to accumulate (achieve higher economic growth rates that will offset the amount borrowed).

So what does all of this mean for the market outlook? Ironically, despite a year of political change that has shaken our social and economic foundations, equity markets have remained resolute. We see no reason to believe that markets will be adversely affected in the short term, although they are likely to remain volatile for the foreseeable future as they come to terms with ongoing fiscal change.

Meanwhile, inflation expectations and therefore bond yields are on the rise, and we have been well positioned to take advantage of the small number of opportunities within the fixed-income sector (more on that later).

We remain cautious and continue to seek opportunities as they present themselves.

A hidden opportunity within the property market?

 

There’s an interesting dichotomy emerging in the property market that we believe could be appropriate for some client
portfolios.

There are numerous ways to invest in the property market without having to take the time and effort of buying ‘bricks and
mortar’. On behalf of our clients, we consider (among others):

  • Property funds
    These funds invest directly in different residential and commercial properties, and the value of the investment reflects
    the estimated market value of the properties at a given point in time.
  • Real Estate Investment Trusts (REITs)
    This is where a company that is listed on the stock exchange buys and manages property on behalf of its shareholders.
    The value of the investment fluctuates to reflect the market sentiment at that time. In other words, what other investors
    are prepared to pay for it on the exchange, rather than what the company believes the properties are worth.

So what happens if the price of these two investments differ, even although the underlying assets are exactly the same? In
the wake of Brexit, we’re experiencing this exact scenario. REITs are currently trading at a discount to the estimated net
asset value (NAV) of the underlying properties, either meaning that the value of property has further to fall, or that REITs
have over-reacted to the challenges facing the property market.

If the latter has happened, and REITs have been forced to take an overly conservative stance in order to protect the interests
of its shareholders, a golden opportunity could be presenting itself. Investors could switch from property funds to REITs,
effectively buying the same thing for less. We know there is a risk that the divergence keeps growing while the Brexit talks
progress, but we think the opportunity is attractive, and we’re keeping a very close eye on it.

Of course, it could turn out that REITs have got the measure of the property market correct, and we can expect to see
further falls in property values over coming months. But that’s the beauty of investing. With careful analysis, it’s possible to
seize an opportunity where apparently there is none. Always accepting that there is some underlying risk of course.

Bonds: our investment approach

 

Our fixed-income analysts have had an interesting and challenging 2016. Core government bond markets (US, UK, eurozone
and Japan) have had extremely low yields, making them very expensive. As a result, we’ve been underweight on this asset
class (minus 6%).

As part of a well-diversified portfolio, it’s important to have exposure to bonds, so we’ve been focussing our attention on
those that are less sensitive to rising interest rates (shorter duration bonds), and those that are backed by a company
(corporate bonds) rather than a government. Traditionally government bonds are more attractive as they are less likely to
default, but we think that the low interest rate environment has made it easier for companies to service their debt, so we’ve
been comfortable with the extra risk, especially since the potential returns were more attractive.

This approach meant we were well positioned for the post-Trump sell-off in bonds and will reinvest any cash flows at more
attractive yields. In fact, our bond fund was the best performing fund in its sector for the month and is fifth for the year
which is hugely encouraging for a fund that follows a more conservative approach.

We expect to continue to take an underweight position on bonds, especially while the global macroeconomic view remains
uncertain, inflation risk mounts, and central bank policy remains at extreme levels.

A word from our Chief Investment Officer

"Our diversified global investment approach continues to successfully navigate a volatile market environment, and has provided much-needed stability for our client portfolios.

Over the next 12 months the UK will in all likelihood start the Brexit process; there will be elections in both Germany and France; a new US President will be inaugurated and take the reigns of the world’s largest economy and China will hold its highly significant five-yearly Communist Party Congress. With 2017 looking to be as changeable and volatile as this year, our focus will remain squarely on providing stability for clients while making sure we are well placed to take advantage of new investment opportunities." -
Philip Smeaton, Sanlam UK Chief Investment Officer

Past performance is not a reliable indicator of future results. The value of investments can go down as well as up and may be affected by exchange rate variations. As a result, the benefits available under any policy/account linked to the model portfolio may be lower than anticipated. You may not get back the amount originally invested. The portfolios referenced above are managed by Sanlam Four.

Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.