Equities (February 2017)

From Reflation to Anti-trade?

“We expect greater volatility ahead with President Trump increasingly pushing an anti-trade, rather than the highly-anticipated reflationary, posture”

- Sean Quek, Head Equity Research, Bank of Singapore

  • Equity markets have defied expectations and done well despite Trump's victory. The reason for the run up is because investors chose to focus on the reflation theme and are hopeful that Trump could boost the U.S. economy through expansionary fiscal policy.
  • Meanwhile, Trump’s increasingly brazen protectionist push could derail global growth. Furthermore, the pace of Fed interest-rate normalisation is likely to pick up. Also, given the busy political agenda, European political risks lurk. Coupled with extended valuations, risk-reward remains unattractive. We maintain our Underweight stance on equities. Regionally, we are neutral the U.S., for its relatively defensive traits, and underweight Europe, Japan and Asia ex-Japan.
  • Without a clearer roadmap, the Trump reflation trade could run out of steam. The increasingly protectionist approach to trade by Trump could also impact U.S. corporate earnings growth and profitability, as a result of higher costs or/and lower revenues. Despite our cautious view on equities, U.S. equities remain more defensive on a relative basis.
  • In Europe, Theresa May’s decision not to pursue partial EU membership will force the U.K. to leave the single market and this has raised more questions than answers. Even as earnings are expected to recover from the sharp decline last year, consensus 2017 earnings growth of 13.7 per cent remains optimistic, in our view. Meanwhile, the risk of political contagion remains, given the busy political calendar. Hence we remain cautious on European equities.
  • We maintain our view that sustained re-rating of Japanese equities would require more meaningful structural reforms that would boost Japan’s growth potential. The weakened Yen would provide a boost to corporate earnings but the rebound in share prices would have largely discounted the consensus 2017 earnings growth of 10.9 per cent. After China, Japan accounts for a substantial share of U.S. trade deficit and is vulnerable to potential trade pressure.
  • Asia Ex-Japan equities rebounded in January, after bearing the brunt of the post U.S. election market response. The “America First” rhetoric during Trump’s inauguration speech does not augur well for the region. China accounts for more than one-third of the overall U.S. trade deficit and will be the focus of any U.S. anti-trade policies. But given the highly connected intra-Asia as well as U.S.-Asia trade links, it is unlikely that any of the Asian markets would go unscathed if the situation turns ugly.