DIY Investor Magazine
/
Jan 2017
12
US ELECTION REACTION: WILL
EUROPE BE NEXT?
Tim Stevenson
, Director of European Equities at Henderson Global Investors
gives his reaction to Trump’s anti-establishment victory, and the implications for
European equity investors
So, a Trump victory. Once again over-turning the
‘accepted wisdom’ that ‘The Establishment’ would win.
This is a message that politicians are out of touch with
the huge groundswell of opinion that the ‘system’ is
not working for them. The implications for Europe are
widespread.
Positives:
Europeans (certainly Europe ex-UK) tend to
be much more ‘Social Democratic’ or more egalitarian
than in the US. The extent of the voter dissatisfaction
is therefore not necessarily as great. Equity valuations
are on the whole lower in Europe, and investors have
broadly reduced their European exposure year to date.
Negatives:
Trump is against ‘Globalisation’ and ‘Open
Trade’. Europe thrives on free trade (as does the world,
arguably). Trump may well use protectionism against
many European companies.
Cancelling Obamacare throws the whole reform of
healthcare back up in the air. Anything with high sales to
Mexico will immediately be given a lower valuation.
Unemployment is higher in many parts of Europe than
in the USA, and therefore the degree of anger with the
establishment has the potential to be as great, if not
greater. Politicians badly need to address this issue
before a “Radical” comes up with a set of easy slogans
that win over the electorate, regardless of the ability to
implement or finance vague promises. Europe has the
Italian Referendum (on reform of the electoral system)
in December. A rejection is now more likely, just out of
the wish to poke the establishment rather than thorough
analysis. France has elections next Spring: does this
fuel the protest parties or ram some sense into the
established politicians? We assume the latter.
The German and Dutch elections next year also raise
the same questions.
Markets and economies hate uncertainty, and we now
have more of that. Can Trump really reflate* the US
economy? What with? Hot air? ‘When the facts change,
I change my mind!’ It seems prudent to take a more
conservative stance for the time being and have some
more cash in the portfolio. There will also be some stock
specific issues to address.
This has not prompted wholesale changes to the
portfolio, if anything it reinforces our preference for
quality stocks yet further. We are reducing our weighting
in banks, as the probability of a December interest rate
hike in the US is understandably reduced.
Longer term, we need to consider whether a set of
reflationary measures by governments (whether in the
US or Europe) changes the inflation outlook. That in
turn has a further knock on impact on the valuation
of ‘growth’ versus ‘value**’, and therefore whether we
should be adding more economically sensitive stocks or
names that are a beneficiary of any attempts at reflation.
Glossary
*Policies intended to help an economy recover and promote inflation.
**Growth investors search for companies they believe have strong
growth potential. Their earnings are expected to grow at an above-
average rate compared to the rest of the market, and therefore their
share price should increase in value. Value investors search for
companies that they believe are undervalued by the market, and
therefore expect their share price to increase.
Past performance is not a guide to future performance. The value of
an investment and the income from it can fall as well as rise and you
may not get back the amount originally invested. The information in
this article does not qualify as an investment recommendation
WHEN THE FACTS CHANGE, I CHANGE MY MIND!
