The backdrop for equity markets is likely to support a continuation of the recent rally into 2017, but Man FRM cautions markets are more confident about Donald Trump’s presidency than they should be.
The Man FRM investment team said the impact Mr Trump’s proposed policies will have on the economy are “too multifaceted to be understood in advance” and that market participants need to be more cautious.
“The confidence with which markets have embraced the fiscal inflationary narrative leaves plenty of room for concern,” the company said.
“This rally can push valuations, with the ‘P’ of price outpacing the realised ‘E’ of earnings in the traditional P/E method of market valuation, but we believe this relationship will revert to lower than current levels with a force that continues to grow as the current rally stretches on.
The company said the outlook for inflation was also “uneasy”.
“If we are to see inflation, then we believe Commodity prices are a likelier source than the more benign fiscal expansion, and it is as hard to see this as a victory for central bank policy as it is to see any real economic benefits that might flow from it,” Man FRM said.
The company warned that markets were currently at greater risk of a “major shock”, adding that “from a political angle the world feels more insecure than it has for a long time”.
“If the more pessimistic commentators are right, then Trump and Brexit are the first indicators of a downswing of global economic integration.”