So the pollsters got it partially right this time. However in the partisan US where President Trump divides opinion like no other before him maybe it wasn’t too difficult predicting the Democrats would win control of the lower house. The slight surprise, if you believed the polls, was that the Republicans extended their majority in the Senate.
But what does this mean for investors?
Very few of President Trump’s policies are now likely to get much traction in the next two years, however one area that is worth looking at is infrastructure. Both Republicans and Democrats agree there is a need to restore much of the crumbling infrastructure assets found in the US. Bridges crumble equally whether you live in a Democrat state or a Republican one. However the way they want to fund the spending appears to be very different. Democrats are more in favour of government spending whereas Trump wants to ensure infrastructure spending is focused on economically productive areas with more private money involved.
If a bill ever passes congress, Infrastructure spending of whatever colour will provide an economic boost to the US. However, much as the infrastructure spend is needed in many areas, it is debatable whether the US economy needs another sugar rush now. Unemployment is at record lows, economic growth is strong and there is a large federal deficit. The big danger is that a huge new package will hasten the pace of Fed rate rises, thus dampening activity and causing further knock on problems for bond investors and Emerging Markets.
The S&P has delivered a return of 4.2% in 2018, however over the last five years it has appreciated 69.4%. President Trump’s corporate tax cuts fuelled the last spurt of growth, however investors need to look to the future and not the past. The PE ratio is about 22, not cheap and above long run averages. Investors have historically been underweight the US markets, which clearly has been a mistake.
Investors should have exposure to the US and the recent pull back has at least brought a modicum of value to markets. Earnings growth is still expected to be good in 2019 following on from a stellar 2018. If investors struggle finding active managers then a simple S&P tracker is no bad bet, however for those wanting active a core holding would be Merian North American Equity or a more specialised holding would be Tyndall North American.
Ben Yearsley October 2018
This article represents a personal view from Ben Yearsley, and is based on his opinion of economic data from the UK and across the globe. It should not be used for investment purposes and does not constitute advice. For investment advice please refer to your financial adviser. No party should act or refrain from acting on anything contained in this material. Relevant primary materials should always be consulted at all times for all purposes. No statements or representations made in this material, document or at the presentation are legally binding on Shore Financial Planning (Plymouth) Ltd or the recipient and no liability is accepted in connection with this material. This article may not be reproduced or circulated without prior permission. Issued by Shore Financial Planning (Plymouth) Ltd, authorised and regulated in the UK by the Financial Conduct Authority.
© Copyright 2018 Shore Financial Planning (Plymouth) Ltd.