Donald J. Trump. It’s almost impossible not to mention his name when pondering the direction that the markets might take next. All it takes is a tweet from the president elect’s account for the markets to react. On Wednesday, for example, pharmaceutical and biotech stocks plummeted as the President-elect said he’d force the industry to bid for government business in order to save the government billions of dollars. But can this trend sustain itself? Will markets continue to react to every word uttered by Trump, or will investors have to start channeling out his noise?
“I think the large deviation moves in currencies and sectors on the back of tweets and comments –that volatility boosting dynamic - will be with us as we start to understand the fine details of what Trump’s policies are going to look like,” explains BlackRock’s chief investment strategist for Canada, Kurt Reiman
. “With the transition from eight years of the Obama administration to the next four years of a Trump administration - and at least the next two years of unified government – we know the equilibrium that was priced into financial markets is not the same, the status quo is over.”
The first two months following the election have been categorized as being positive for the economy, markets and as a good sign for reflation, but the details of policy, which remain so unclear, really do matter.
The optimism that remains around the shifting policy landscape south of the border has been priced into markets, and Reiman doesn’t see the handoff from monetary to fiscal policy as being particular smooth. “To that extent, some of the returns we saw in 2016 will cannibalize the returns we’ll be able to achieve in 2017,” he says. “That said, I think this reflation trade that’s starting to be priced into markets is durable and has some legs. That means I would be positioning a portfolio overweight in stocks versus bonds in an attempt to find some growth opportunities and target parts of the market that have some value left in them.”
Reiman sees valuations in the North American equity markets are being a bit stretched, which will result in more muted returns from stocks than investors have been comfortable with. “However, I still think stocks are the better option, partly because the reflationary story is taking hold, but also because the opportunity in bonds looks really limited,” he says. “Reflation tends to eat away at the returns from the bond market. It compromises what has been a very impressive, 35-year-plus, run of back to back performance.”
Reiman also advises investors to show caution in some of the more rate sensitive parts of the stock market, like consumer staples and utilities. It’s a good time to pursue dividend growth strategies, he says. “In Canada, one of the strong, durable dividend growers would be the financials,” Reiman says. “Globally we like financials and that would be a sector play that I would point to. I think healthcare is an underrepresented sector in the TSX so advisors in Canada are going to have to look overseas: I think there are good opportunities in the US and Japan.”
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