Last week was an eventful week for US news flow, with the Trump administration providing some colour to its proposed upheaval of the tax system, a softening of the president’s stance on the North American Free Trade Area (calling for renegotiation rather than withdrawal) and agreement of a budget to avoid a shutdown of the US federal government, as well as the marking of president Donald Trump’s first 100 days in office.
Traditionally in the USA, the first 100 days of a presidency marks a key point for reflection on progress against campaign pledges, as this is a period when new administrations normally enjoy a honeymoon period of goodwill and incoming teams seek to hit the ground running, demonstrating energy in implementing new legislation.
In the case of the controversial Trump administration, there has been no such period of general goodwill after one of the most divisive and acrimonious election campaigns in living memory and against the backdrop of allegations of covert Russian meddling.
In terms of turning campaign pledges into hard legislation, Trump has struggled on multiple fronts. His proposed travel ban for citizens from a range of Muslim-majority countries is tied up in legal challenges, and his initial attempt to pass a new healthcare act that would rein back on ‘Obamacare’ was aborted after failing to secure enough support in Congress even from his own Republican party. That does not augur well for success enacting other policies.
From an investment perspective, the election of Trump initially saw an outbreak of investor bullishness over his proposed cocktail of measures to boost US growth. This included significant reform of the US tax system, incentivising US multinationals to repatriate profits held in overseas subsidiaries, major investment into creaking US infrastructure and cutting red tapes for the US banking sector.
When US growth picks up, that’s usually good news for the global economy. Notably, purchases of US equity and global equity funds (which typically have high US exposure), by UK investors became more popular following the election, while at the same time many investors have continued to shun UK equities – perhaps due to ongoing anxiety around Brexit.
As we regularly point out, markets have a habit of lurching between Hope and Fear. There is also a tendency by investors to forget that politicians routinely over-promise and under-deliver as campaign commitments get thwarted by horse-trading, compromises and partisan gridlock.
The stumbling progress of the Trump administration in enacting its policy agenda means that there are serious doubts around the extent to which Trump’s bold economic prescriptions will see the light of day.
The Trump administration has sought to renew policy momentum with an announcement on its plans for reform of the US tax code, a statement which was trailed in advance with much fanfare by the president on his own Twitter account.
But the statement amounted to a single page of bullet points, rather than a detailed document. The proposals on the surface are undoubtedly bold and include aggressive cuts in corporate taxes to 15 per cent and the streamlining of seven income tax brackets into three new ones.
But the lack of detail – which included no indication of the threshold levels at which different income tax rates might kick in - has created uncertainty and confusion, most notably over whether such measures will widen the US deficit. This much-vaunted announcement has disappointed the financial markets thus far.
From an investment perspective, it is worth looking at how those who UK investors caught the Trump-bug and piled in on the back of the election have fared.
Total return on the S&P 500 index since Trump took up office, in USD and sterling (click the graph for a larger version):
Since the election, US equities as measured by the S&P 500 index (including reinvested dividends) have risen by 12 per cent in dollar terms, but for sterling-based investors a strengthening of the pound since mid-January has shaved the return to 8.7 per cent.
While that’s impressive for any investment over such a short timescale, the UK’s FTSE All Share actually rose by 9.2 per cent in total return terms over this period.
Of course, these are short time periods and it is still possible that the Trump administration will get policy cut through.
Irrespective of this, including US equities in a long-term portfolio makes sense, as the US is home to some of the finest listed businesses on the globe, and is the premier market for many high-growth industries such technology and healthcare.
But investors should be wary about making major investment decisions primarily based on political developments, as politicians often disappoint.
One of the major risks faced by those UK investors who aggressively bought into the Trump-story last autumn is that they deployed their hard-earned pounds at a point when sterling was oversold, to buy US shares that are standing at historically very expensive valuations on most measures.
These investors could be exposed to a double whammy of both a recovery in Sterling and a possible bursting of the US equity bubble at some point.
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