He believes the travails of President Trump are behind the current sell-off in equities.
Hollands said, ‘With President Trump fighting allegations that he attempted to influence an FBI investigation and claims that he shared classified intelligence with the Russian ambassador, there is increasing chatter about this spiralling towards a potential impeachment process. This has caused a perfect storm for financial markets, with the S&P 500 Index sliding -1.8 per cent yesterday and NASDQ taking an even worse beating of -2.6 per cent. The VIX index – a barometer of US stock-market volatility – climbed (around) 45 per cent yesterday to close at 15.6 after a period of languishing at very low levels. In contrast there has been a spike upwards in safe haven assets, notably with gold climbing +1.95 per cent.’
The analyst continued, ‘Time will tell whether the crisis engulfing the US administration escalates or dissipates but in truth investor faith in the so-called “Trump trade” has been fading for some time given the administration’s floundering progress in enacting its economic agenda of aggressive tax cuts, massive infrastructure investment and banking deregulation. Notably, US banks were amongst the worst hit sectors yesterday.’
The ‘Trump trade’ was the view taken by many market participants that the policies of Donald Trump would lead to higher levels of government spending in the US, boosting global growth and inflation.
That made those market participants invest in commodity stocks, and businesses that benfit from US infrastructure spending.
Hollands continued, ‘There are of course plenty of reasons to be positive at the moment despite these jitters. Economic indicators have been improving and the S&P 500 reporting season has been strong with a healthy uptick in earnings at most companies – factors which this still young Presidency cannot take credit for. Yet the conundrum for investors is that on most valuation metrics, US equities are expensive. This does not necessarily signal the US market is set for a so-called correction after yesterday’s wobble – no one really knows. But a reasonable view irrespective of the political noise is that earrings ultimately need to play catch-up to justify current stock prices. There are certainly reasons to be cautious about being aggressively overweight US exposure in the current environment.’
He remarked that, ‘For UK based investors, an additional risk is currency. The stellar returns many enjoyed on their US fund holdings last year were compounded by the sharp depreciation of Sterling as a result of the UK’s vote for Brexit and yet another volley of QE from the Bank of England. But the tide of opinion has shifted towards viewing Sterling as oversold and more recently it has been gaining ground on the Dollar. A commanding win by Theresa May on 8 June and a more constructive set of negotiations than anticipated, could all propel Sterling higher as would a change of direction by the Bank of England. While I would strongly caution investors against making bold decisions primarily on the basis of the fickle and unpredictable world of politics, nor indeed on speculation. about the short term direction of markets and especially currencies – there maybe a case for some investors to revisit their exposure to the US and consider trimming positions that have ballooned over the last couple of years.’
Hollands concluded his comments with the remark that, ‘It is important to stress that the US absolutely deserves representation in most investor’s long term portfolios. The US is the world’s largest equity market and home to many of the best businesses on the planet that it would be wrong to ignore. But the exceptionally strong returns of the last year, turbocharged by currency shifts mean that many UK investors may now find themselves considerably overweight compared to what might be their natural long-term exposure. And with rich valuations on US shares and currency uncertainties, this might be a sensible time to rebalance exposure irrespective of whatever happens to the embattled Trump administration.’