Sector and geographic rotations offer relative value opportunities

Investment strategy - 5/4/2017

The journey ahead for both Donald Trump and Theresa May will be arduous, drawn-out and most probably rather lonely, as the former tries to deliver his much-hyped tax reforms and the latter triggers Article 50, attempting to divorce the U.K. from Europe, whilst remaining on friendly speaking (trading) terms.

The recent failure by the Trump administration to reform Obamacare has at least temporarily taken some of the froth out of the markets, which as recently as a couple of weeks ago appeared to be in danger of a “melt-up” scenario with prices reaching levels many strategists had penned in for their year-end targets. However, concerns about a “melt-down,” courtesy of this policy initiative set-back, seem to be overdone, as Trump will relentlessly continue to drive his pro (USA) business agenda and shift his focus to the arguably more important subject of tax reform. There is still a chance that Obamacare implodes anyway, which would allow Trump to use the “I told you so” rhetoric he would clearly love to. Moreover, central banks on both sides of the Atlantic remain ready and willing to adopt a flexible approach to monetary stimulus should a pause in economic growth be observed courtesy of a delay in fiscal reflationary stimulus.
Understandably, most financial commentary is centered around the major equity and bond markets, however to focus solely on these would be to ignore risk, signals and miss opportunities. The oil price is rolling over, certain currencies such as the British Pound and Japanese Yen are strengthening counter-trend, and sector and geographic rotations offer relative value opportunities. It is therefore vital to spend time and consideration on these and other aspects to guard against after-the-event analysis and regrets.

The 4 main points covered by this latest edition:

  • The financial markets took a break in March.
  • The economic environment remains buoyant for equities.
  • We are continuing to underweight bonds.
  • The financial markets are not expecting a lot of volatility.

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