Equities (April 2017)

Is the Equity Rally Stalling?

“With nothing concrete to show as Trump approaches his first 100 days in office, the failure of the Republicans to replace Obamacare is triggering fear that the reflationary trade might not materialise as easily as the market has come to expect since November.”

- Sean Quek, Head Equity Research, Bank of Singapore

  • Global equities had a more difficult month in March as doubts about Trump and the Republicans’ ability to push through reflationary and growth boosting policies brew. Investor sentiment continued to be underpinned by U.S. macro and political events. While the more dovish than expected Fed buoyed risk appetite, the Republicans’ failure to replace Obamacare dented confidence. It remains to be seen how much longer the market’s patience can last.
  • We remain cautious on equities given the concerns cited above and also because of the extended valuations and the unattractive risk-reward trade off. Regionally, we continue to prefer the U.S., for its relatively defensive traits, and stay cautious on Europe, Japan and Asia ex-Japan for now.
  • The Trump reflation trade will start to run out of steam unless there is clearer signs that Trump’s tax reform plans, a key component of his growth boosting agenda, remains on track. Fundamentally, a stronger U.S. dollar, higher interest rates and tighter labour market suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis.
  • Although firmer economic growth on loose monetary policy and fading fiscal austerity is expected to provide a boost in the Eurozone, consensus 2017 earnings growth of 16.1 per cent remains optimistic. At the same time, forward Price-to-Earnings (PE) valuation of 15.4 times, versus the 5-year historical average PE of 14.4 times, is not undemanding. Le Pen’s odds of winning declined but European political risks remain, especially given the busy political calendar ahead. For these reasons we remain cautious on European equities.
  • On Japanese equities we maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. After China, Japan accounts for a substantial share of U.S. trade deficit and is vulnerable to potential trade pressure. Near-term, the market would continue to be driven mainly by macro factors and movements of the Yen. Valuations, at forward PE of 15.8 times versus the 5-year historical average of 14.6 times, are not undemanding.
  • • It would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, but investors seem surprisingly sanguine. It remains to be seen if the failure in healthcare reforms would push the Trump administration to accelerate its tax reform agenda or pursue trade protectionism. Coupled with the potential impact of faster-than-expected U.S. interest-rate normalisation and currency vulnerability, we remain cautious on Asia Ex-Japan.