Firms start to change U.S. weightings after health-care setback
Global money managers are starting to act on the so-called Trump gap, as the space between what President Donald Trump promised on the campaign trail and what he can deliver begins to widen.
Concern is mounting over Mr. Trump's ability to follow through on regulatory and tax reforms and increased infrastructure spending after the president and a Republican-controlled Congress failed to repeal and replace the Affordable Care Act.
That early miss put a damper on the good feeling that followed Mr. Trump's election and is pushing some executives to pull back from U.S. exposure.
In recent days, Mr. Trump has underscored in interviews the importance of reforming health care before tackling taxes.
“The failure of deal-maker Trump to even reach a deal with his own party is a clear wake-up call that campaigning successfully is something different than governing successfully,” said Lukas Daalder, Rotterdam, Netherlands-based chief investment officer for Robeco Investment Solutions. “The more (he) is forced to stick to deficit-neutral changes, the more limited the overall reflation impact will be for the economy as a whole.”
Robeco has moved to overweight European equities at the expense of U.S. equities, Mr. Daalder said, given the relative high valuations of U.S. stock markets and added execution risks with respect to the Trump agenda.
The failure to repeal the Affordable Care Act also pushed Nikko Asset Management to shift its U.S. exposure to neutral, said Steve Williams, London-based portfolio manager on the global fixed-income team. “The subsequent failure by (the) administration to swiftly repeal Obamacare saw the markets question the viability of the future policy direction by the new administration, particularly the ability to pass ... tax reform,” he said.
“The apparent political deadlock diminished the prospects for a broader reflationary impulse from the Trump administration,” with U.S. Treasuries rallying in the latter part of the month, he said. U.S. 10-year Treasury bonds topped 2.6% in the middle of March, and slid to about 2.4% at the end of that month.
Aviva Investors' multiasset team positioned strategies for higher interest rates, growth and inflation even before Mr. Trump's election “supercharged” the story, said Nick Samouilhan, London-based senior fund manager, multiasset. “But we are well aware that markets have got too far ahead and may fall back,” he said. The firm moved in January to add positions that would hold out in a reflationary scenario and also in a less-positive situation.
Tax reform remains a focal point for money management executives.
“Since Trump's election and subsequent inauguration, we have been skeptical about his ability to push through the full extent of his campaign promises and policies,” said Chris Teschmacher, London-based multiasset fund manager at Legal & General Investment Management. He noted even Mr. Trump said his proposals were flexible suggestions, and LGIM assumes about half of the full fiscal stimulus outlined might actually be delivered.
“To that degree, the failure of the health-care bill does not appear to change the highly uncertain outlook for the timing or magnitude of the fiscal stimulus. On the one hand, it shows how difficult it is to get Congress to agree; on the other, there is now greater pressure on the administration to deliver on tax cuts,” said Mr. Teschmacher.
“Everyone is now looking to the great man to do his stuff,” said Ariel Bezalel, head of strategy, fixed income, at Jupiter Asset Management in London. “Markets are pricing in a lot of hope that Donald Trump is going to help to stimulate the economy, do a lot of the kind of reforms he was talking about.”
The health-care issue “puts a bit of a damper on the aggressive tax reforms and spending he was hoping to do. It is very significant, and I have been saying for a while now there is scope for a lot of disappointment here,” said Mr. Bezalel.
Neil Dwane, global strategist in London at Allianz Global Investors, agreed tax reform is the next big thing. “The American corporate has been looking for a tax cut. So some of the buoyancy in U.S. equities and high yield has been based on, "We're going to be richer soon.' If we expect Trump to be slower and lower ... it is not surprising that maybe the market is starting to recalibrate the Trump flush we've had since his election,” he said.
Timing an issue
Executives said they are keeping a close eye on the timing of any tax reform.
Toby Nangle, manager of the £540.2 million Threadneedle Dynamic Real Return fund at Columbia Threadneedle Investments in London, said he recently reduced exposure to U.S. equities given “execution risk” around any changes, and said the administration might be running out of time to deliver a tax reform package before next year.
One part of the reform that is vexing executives is regarding the tax treatment of business investments. If the administration implements changes starting next year, “that could have a negative effect on the economy by causing companies to defer investment until the tax rate is in place. And if they defer investment, not only has the market paid up for corporate tax cuts ... but also there could be a question about whether there is some risk around the execution of the tax reform, and that could cause a bit of a setback in investment activity,” said Mr. Nangle.
But something will have to happen, managers said.
“I think (the Trump administration is) in a situation where they have to pass some tax bill, as the presidency will be viewed as somewhat of a failure in the midterms if (they) don't have some tax legislation passed,” said Ken Taubes, Boston-based head of investment management U.S. at Pioneer Investments.
Deregulation, however, looks more positive. “It's the part that's hard to quantify for economists. ... He has begun the process of deregulating,” Mr. Taube said.
Overall, the markets appear to “trust the Trump team to deliver,” said Pierre-Henri Flamand, CIO at Man GLG in London. Executives are watching the situation carefully, and don't see the market capitulating for now. “There are numerous savvy people surrounding the president, and I don't see anyone willing to bet against them for now,” he said.
Having said that, Man GLG executives “believe it's possible that taking positions against the U.S. market might be win-win. If there is no delivery, then the U.S. may pull back and underperform and, if Trump delivers, the reflationary tide has the potential to lift everyone, with the higher beta of international markets possibly leading to U.S. underperformance,” said Mr. Flamand.
'Trump gets too much credit'
One point dampening concern is that markets were already doing well before so-called Trumpflation kicked in.
“I think (Mr.) Trump gets too much credit for the rally we've seen — it was underway from the middle of last year,” said Edward Perkin, chief equity investment officer at Eaton Vance (EV) Management (EV) in Boston. The rally toward the end of last year was “not just about (Mr.) Trump's policies. There is general enthusiasm about the economy and willingness to buy growth-oriented stocks.”
That view is shared in Europe.
“Another key support has been the synchronized growth momentum seen in the economic data across the globe,” Mr. Daalder said. That data, not linked to Mr. Trump, as well as a solid set of earnings in the fourth quarter, gave “potent support to stocks.”
The stimulus and effect of the administration under Mr. Trump “has really been overdone in terms of the way markets have perceived it,” said Phil Poole, London-based head of research at Deutsche Asset Management.
Executives at the firm have reduced risk, moving slightly underweight overall equities and reducing U.S. equities allocation across multiasset portfolios. The general equities underweight reflects executives' thinking that markets will correct over the next three months — “that is not dramatic,” Mr. Poole said, “but recognizing that people have got carried away in terms of what Trump means.”
This article originally appeared in the April 17, 2017 print issue as, "Managers losing faith over Trump policy promises".