Reasons why you shouldn’t treat US Investments like a Gold Rush
There’s two extreme ways you could look at the US Election result. If you see it as an unmitigated disaster with a new leader about to disrupt the world economy, you may be tempted to turn to ‘safe’ assets such as gold.
If on the other hand, you see this as an opportunity to ‘Make America Great Again’ you may be convinced to pile your investments into US stocks to make the most of a modern day ‘Gold Rush’.
There are some very good reasons why neither reaction is appropriate for your pensions or other investments.
Last week I sent my clients some thoughts on how the US election result affects their investments at this time.
This follows meetings with 5 UK fund managers, including Richard Buxton – CEO of Old Mutual, Neil Woodford of Woodford Investment Management, Mark Barnett – Head of UK Equities and Simon Clinch – US Equities Manager, both from Invesco Perpetual, to consider if this event warrants any changes in the portfolio strategy for our clients.
I would like to share my thoughts with you too.
From monetary policy to fiscal stimulus.
The 4 main central banks, The Federal Reserve, Bank of England, European Central Bank and the Bank of Japan have all made extensive use of two prongs of monetary policy in recent years – expanding the money supply though Quantitative Easing (QE) to influence demand, and adjusting interest rates to control inflation.
The US Treasury were the first to get a grip of the financial crisis of 2008/9 following the collapse of Lehman Brothers. Fund managers agree that while this has probably avoided further recession in the US and UK, and certainly a global depression, monetary policy is largely a spent force.
That leaves fiscal stimulus, in terms of tax cuts and spending, as the only practical options to stimulate economic growth.
It has been the slowest US recovery since the 1930s and the 3 pressing concerns of fund managers and economists looking for investment growth are:
- Demographics; an ageing working population
- Mounting debt to Gross Domestic Product (GDP) ratio.
- Widening wealth inequalities between rich and poor.
The first pillar of Trump’s growth strategy is a pledge to spend a Trillion Dollars on new infrastructure projects in the shape of hospitals, roads, bridges etc. He has stated an aim of returning 4% on US Gross Domestic Product (GDP) as a measure of success.
A slower path of growth
The fund managers I’ve spoken to think we have a year or two of volatile markets ahead, but do not think a recession likely. The consensus is on a prolonged period of slow growth, making Trump’s plans for adding 4% on GDP each year wildly ambitious. The number of people of working age is declining and productivity is in historical decline. Any curbs on immigration will tend to exacerbate this situation.
Bold ambitions aside, you don’t have to like the man to see that his policies could still be good for the US economy. But as we know, infrastructure projects take time to get off the ground. That’s after convincing the likes of Paul Ryan, Speaker of the House of Representatives and other more moderate Republican colleagues who do not favour high spending, to agree to such plans. Not a 5 minute job either.
Tax cuts as a driver of growth
Tax reduction is the second pillar of Trump’s growth strategy. Let’s look at the factors that may affect this:
- His plans to reduce corporation tax from one of the highest in the world at 35% down to 15-20% (it is 20% in the UK) will take some doing and of course hits revenue into the US Treasury. The hope of this stimulating employment will take time to work through into positive figures, as the process from hiring decisions to recruitment can take 12 months or more.
- The plans to reduce tax for American citizens may be well meaning too, but the statisticians are predicting that around half of this will go to the richest 1%. As these tend to be older people with the tendency to save more and spend less, a much smaller proportion of such tax cuts will filter back through the economy to stimulate growth.
- The US Dollar is widely seen as being overvalued and with Trump’s spending plans the levels of US debt will reach 120% of GDP, close to the ratios of Greece and Italy. As there is no revenue source to back these plans he is relying on rising tax receipts to compensate for the money pumped into the economy.
- Trump brands regulation as a ‘growth killer’ and some repealing of US business red tape may well have a positive effect on business expansion.
How does this affect my investments?
It is far too early to tell how easily Trump’s tax reduction and spending plans will run through Congress and how long that will take to manifest itself in rising incomes and business growth.
Some financial advisers are jumping to the conclusion that shifting part of their clients’ investments now into specific US funds that include energy, materials and infrastructure is bound to see good returns.
Infrastructure is undoubtedly a boom area for investment. Indeed, our own Chancellor, Philip Hammond, has announced a number of measures to boost UK infrastructure, including a £23bn National Productivity Investment fund.
But over-exposure to US Equities seems like a ‘Gold Rush’ mentality to me. Heading for the hills in search of prosperity without first doing the research on where nuggets of wealth are likely to be found, is a strategy based on luck, not judgment.
That is not to say I do not think some growth will follow years down the line. However, we take the view at Oaklands Wealth Management that exposure to this market through global funds that include selected US stocks, something we are doing already where appropriate, is the best way.
Let us remember, the new US political administration has yet to begin its first day at work.
Until Trump’s priorities become clearer, it is little more than guesswork as to which companies within the supply chain will benefit from the increased spending and present us with genuine investment opportunity.
Meanwhile, if you have doubts about the positioning of your investments, there’s still time to get them checked over.
I have 2 slots left in my diary in December for a no-obligation, exploratory chat.
Call my office now on 0121-355-4455 if you’d like to reserve one of them.
Kind regards, Helen