According to Richard Saldanha, global equities fund manager at Aviva Investors, the positive news coming out of the US is that tax cuts have provided a ‘halo effect’ in equities.
“US companies are printing year-over-year earnings of over 20 per cent, and the tax cuts are a big part of that,” Mr Saldanha said. “But it’s also important to remember the repatriation of offshore profits.”
Once companies bring cash back onshore they can deploy it more effectively, he added.
“Some of that capital will be returned to shareholders via buy-backs and dividends, but we are also seeing more money going into capital expenditure as well as M&A. Over the longer term, that increased corporate investment will bring benefits.”
However, the fund manager believes Trump increases tail risks: “His Twitter posts can cause volatility among the companies or sectors he attacks, such as pharmaceuticals or tech,” he said.
Aviva Investors also believes Trump’s stance on trade is the big longer-term concern. Mr Saldanha said a full-blown trade war would be negative not just for US equities but for equities and other asset classes globally, because protectionism and tariffs are detrimental to growth.
“It’s frustrating as an investor, because the only way you can deal with the associated uncertainty is to apply a discount – perhaps a small percentage, but a discount all the same – to your valuations across the board, even if a full-blown trade war isn’t your base scenario.”
Alistair Way, Aviva’s head of emerging market equities, noted that rising trade has been a key driver of growth across emerging economies and a key factor in the convergence between emerging and developed markets over the last few decades, so greater protectionism is a big risk.
“But given how interconnected the global trading system is, this isn’t just a problem for emerging markets. Some of Trump’s more extreme threats, such as relocating iPhone production from China to the US, would bring all sorts of consequences for supply chains and the cost of goods for consumers and companies across the world,” he said.
