Following the celebration of Independence Day in the United States, a number of US equity portfolio managers have shared their thoughts on Trump’s first half year at the White House and their US market outlook.
Ed Cowart, portfolio manager of the Nordea 1 – North American All Cap Fund
“Economic data has generally improved since late 2015 and the US economy has continued to show signs of strength so far this year. We also believe the outlook for corporate-earnings growth has improved as well. If we are correct on the direction of both economy and earnings, we believe valuations for US stocks look okay.
“On an absolute basis, we believe the market is about fairly valued at 17x forward earnings. Today’s valuations may be slightly above the long-term historical average but they are well within normal range. Over the near term, we believe the direction of P/E ratios is far more important than its level.
“We also believe it is important to consider where we are in the business cycle as equity valuations tend to follow the path of leading economic indicators, which are still in an improving trend. Some sectors of the market have become somewhat expensive, but others still look very attractive and that is where we focus most of our attention.
“The positives in the market and the economy are encouraging but we are mindful of potential headwinds to this bull market, including the potential failure of the Trump administration to implement agenda items such as corporate-tax reform, regulatory relief and infrastructure spending. We believe the most probable scenario is that corporate tax reform will happen this year.
Heather McPherson, portfolio manager of the T. Rowe Price US Large Cap Value Equity Fund
“US equity markets have continued to move higher this year, and although macroeconomic uncertainty remains high, we continue to feel good about the overall economy. US fiscal policy, including tax and regulatory reform and infrastructure investment, has the potential to positively impact markets; however, rising interest rates and future trade policy will need to be closely watched.
“Globally, manufacturing continues to be healthy and consumer sentiment appears to be improving, but we remain mindful of the risks associated with protectionist policies and the economic effects of the UK’s exit from the European Union. As the details of future policy become known, stock selection will be increasingly important in identifying the beneficiaries and those left behind.
“Although valuations in the US large-cap space appear more stretched, we have identified select opportunities that have fallen due to short-term headwinds but also feature a path for improvement over the longer term. The companies we focus on tend to have good management teams and strong balance sheets, and they often have been overly discounted due to macroeconomic concerns.
“For example, we still find the risk/reward profiles of select financials companies to be compelling and recently bought shares of Wells Fargo and US Bancorp.”
Mark Sherlock, lead portfolio manager of the Hermes US SMID Equity Fund
“Confidence in the US equity market has been shaken following President Donald Trump’s failure to deliver on key election pledges. Following his astounding victory in November, markets went into overdrive as investors, electrified by pro-growth pledges, poured into US equities. Now reality is biting, as Mr Trump realises implementing policy is more difficult as President than as CEO.
“In the short-term, this has created market volatility. However, long-term investors can take comfort that while Mr Trump’s pro-growth stance was the lightning rod for the recent market rally, the real underlying investment case for US equities is the strength of the US economy. This remains the fundamental reason to invest in US stocks, particularly small and mid-caps which have a higher domestic exposure.
“One sector we favour is regional banks, firstly, because of the anticipated deregulation tailwind, and secondly, we expect the margins of banks to improve as interest rates gently ascend. The net interest margin – the spread between the level at which they loan out versus deposit interest rates – has been under pressure, but we should see an expansion of this spread with interest rate creep.”
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