Trump’s inauguration and the effect on equities
By International Adviser, 20 Jan 17
As Donald Trump is sworn in as the 45th president of the US, International Adviser has compiled the latest views on how his inauguration may effect your investments.
James Horniman at investment manager James Hambro & Partners:
Donald Trump’s inauguration this week could prompt a more balanced assessment of investment prospects and there may well be a pressure-cooker moment when markets in many countries let some steam out, as they did last February.
A correction may bring with it buying opportunities. We believe the recent stock market surge in the US in particular reflects market confidence in Trump’s approach to fiscal stimulus. In the FTSE 100 it has been more about currency movements, but there is talk of fiscal stimulus here too.
Some are concerned that fiscal stimulus would lead to rising interest rates and inflation. Figure two (see attached) shows how inflation expectations are rising sharply in the US and the UK. The charts show the 10-year break-even rate.
This is a market-based measure of expected inflation – the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
We should not be afraid of an increase in inflation if it is gradual and controlled. We may have become unaccustomed to it, but inflation can be a sign of economies working normally. What has been relatively abnormal is the low-interest/low-inflation environment we have experienced since 2008.
The financial crisis was caused by banks becoming too greedy and overleveraging. Many have now rebuilt themselves on more robust and sustainable foundations.
Quantitative easing has been the life support that has helped markets recover, and now we are beginning to see them able to stand on their own feet unaided again. There will be wobbles.
Donald Trump’s unusual approach is naturally unsettling for those of us in the UK used to less “charismatic” politicians. Elections in Europe through 2017 and the end of the Brexit phoney war all make us wary. But economic recovery in the US looks encouraging and this could be expected to have major benefits for other economies, including ours.
Tags: Natixis | Old Mutual
