66. Kentucky. There’s more to it than just fried chicken
Mark Sherlock, lead portfolio manager of the Hermes US SMID Equity fund, and his colleague Steve...
With the continued rise of the US stock market, it might seem that America is on a path of unstoppable growth. But having been unable to get rid of Obamacare (at least in his first attempt), Trump has failed to deliver on one of his election promises and people are now looking closely to see if he can deliver on others.
Ariel Bezalel, manager of Elite Rated Jupiter Strategic Bond fund, comments: “As expected, the US central bank (the ‘Fed’) raised interest rates by 0.25% to a range of 0.75%–1% on 15 March. But the accompanying statement struck a more dovish tone than anticipated by the markets, reducing the number of further expected rate hikes this year from three to two.
“In our view, this may be due to uncertainty around President Trump’s plan of action and we remain cautious on what is now being called the ‘Trump gap’ – that is, the scope for disappointment between now and when Trump delivers his policies.”
This is a view shared by Mark Sherlock, manager of Elite Rated Hermes US SMID Equity. He says, “It’s impossible to analyse Trump. His policy discussion is interesting but you can’t pre-empt it or try to call it as he could easily change his mind or find he can’t do exactly what he wants. There is a big difference between rhetoric and reality so you just have to ignore it and focus on the data.”
Ariel continues: “We think it is highly unlikely that Trump’s trillion dollar infrastructure spending plan will successfully pass through Congress without being watered down. There are also indications that his tax reforms will be pushed back to next year.
“In addition, we have noticed that lending standards at banks in the US appear to be tightening, leading to slower loan growth, which represents another potential risk for growth prospects. “As a result, we believe that US treasuries (government bonds) are showing signs of value once again. With the US 10-year treasury yield reaching 2.5% in February, up from a low of 1.3% in July last year, and the 30-year yield at around 3%*, we believe that valuations are already pricing in considerable macro improvements and do not take into account the possibility of the Trump administration failing to deliver on reforms.”
Mark is slightly more positive and says that all the noise surrounding Trump and reaction to his every Tweet is hiding the fact that the US economy is actually in pretty good shape. He concludes: “Unemployment is falling, wages are rising and consumer confidence is improving. The US election acted as a lightning rod for a change in expectations and markets are now feeling more positive. Smaller businesses in particular are excited about deregulation, which could help increase profits. Historically, smaller companies outperform when interest rates rise. This is because they are both indicative signs of a growing economy.”