Trump in the driving seat: investment caution should prevail

As we approach the inauguration of Donald Trump, two investment experts explain why they remain cautious about being bullish or making portfolio adjustments related to Trump's presidency.

James Horniman, investment manager at James Hambro & Partners, believes the recent stock market surge in the US in particular reflects market confidence in Trump's approach to fiscal stimulus.

He says that while some are concerned that fiscal stimulus will lead to rising interest rates and inflation, investors 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.'


Witold Bahrke, senior strategist at Nordea Asset Management, says that although inflation expectations have risen and investors are increasingly buying into reflation trades - avoiding bonds; favouring cyclical equities such as housebuilders or TV companies and growth-sensitive commodities - markets are still only pricing in two Fed hikes for 2017.

He adds: 'If a regime shift in the direction of sustained higher inflation and higher real growth were to happen, the Fed would almost certainly be forced to hike more than two times over the next 12 months. Either the Fed is mispriced or too much growth upside is priced into risk assets.'

When it comes to whether now is a good time to invest, Horniman explains that generally he would advise investors to drip-feed money into the stock market over time, unless market opportunities are particularly enticing.

'Similarly, for those adding substantially to their existing portfolios, we would probably be wary about piling money immediately into equities when valuations are so high. On the other hand, investors do need to remember the eroding power of inflation on cash,' he says.

'Market timing is very difficult and those who try it often end up worse off, as investors who piled out of the FTSE 100 in the immediate aftermath of the Brexit result have found.

'In times like this we believe there is an element of fortune favouring the brave - though not the reckless.

'Our portfolios typically have 10 per cent cash, reflecting some of the uncertainties and our concerns about the lack of downside protection currently provided by bonds - which might ordinarily be expected to play a bigger part in portfolios.

'We expect to continue favouring equities over bonds (particularly given concerns about inflation). We will be selective, continuing to prioritise cash-generative companies with strong managements, competitive advantages and the capability of delivering rising dividends.'

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