Hardly ever has investor sentiment towards US equities been as negative as it is now: according to a recent Expert Investor survey, a third of Europe’s fund buyers plan to decrease their allocation to US equities over the next 12 months, while less than one in five intend to step up exposure (check Expert Investor‘s May magazine for a detailed account on the latest asset allocation trends). And most are already underweight.
In the immediate aftermath of Donald Trump elections, US stock markets rallied on the back of high expectations about increased investments, tax cuts and deregulation. European investors were eager to join in, but started their retreat in February as the reality of Trumpian rule started to bite.
The Trump premium
The progress of US stocks was halted as self-proclaimed ‘dealmaker’ Donald Trump FAILED to get anything done during his first 100 days in office, but the S&P 500 is still trading more than 15% above pre-election levels, even though earnings estimates haven’t improved. Understandably, most European investors have therefore concluded that markets continue to trade on an unjustifiably high ‘Trump premium’.
But are markets really pricing in substantial tax cuts and higher domestic growth?
The answer is that they did initially, but they have gradually adopted a more realistic stance, believes Nicolas Janvier, US equity portfolio manager at Columbia Threadneedle.
“Since early December, the companies that pay the highest amounts of tax have dramatically underperformed the S&P 500 after initial strong gains right after the election,” he told a press briefing in London on Wednesday (see chart below). This suggests that markets are not as sure Trump will follow through on his promises of substantial tax cuts, said Janvier.
Markets have also backtracked on their initial expectations that US companies with high exposure to the domestic market would profit disproportionally from Trump’s policies. “The supposed beneficiaries of Trump’s policies have been underperforming since December,” said Janvier (see chart below).
Companies that engage most in share buy-backs, an indicator that they have a lot of overseas cash holdings and as such could benefit from tax breaks if they repatriate cash back to the US, have also lagged recently, suggesting markets have toned down expectations on this front too.
This doesn’t change the fact that US equities still look expensive overall, especially compared to European and EM stocks. Buying a S&P 500 tracker would therefore probably not be recommendable.
But, says Janvier: “In December it looked like all supposed Trump benefits were priced in, but that’s not anymore the case. This means there are opportunities on a company-by-company basis.”