For the quarter ended January 2017
President Trump has hit the ground running. He’s moving fast to implement his agenda and surround himself with advisors who are successful business people and have business interests at heart. Trump’s substantive policies for companies include tax reform, infrastructure investment and deregulation. While these will take time to implement due to the required approval of Congress, the impact on forward earnings is already starting to be baked into some analyst’s expectations.
At the same time, investors will need to get used to the announcement of more populist policies, either by Executive Order or often from President Trump’s Twitter account. This “twitter risk” will keep markets on edge, but for investors in general the important lesson is to focus on the impact of any announcement on underlying earnings and valuations. The President of the United States is given a lot of power to make unilateral decisions by Executive Order, particularly on contentious issues such as immigration and trade.
Figure 1. President Trump has hit the ground running
Source: Forsyth Barr analysis, Wonkblog
Even before Trump’s “make America great again” pledge, manufacturing in the United States was doing well. Real spending on industrial equipment rose to a record high at the end of 2016.
The improving economic outlook is widespread with manufacturing data, services and business confidence surveys all pointing to a strong start to the year in the United States, Europe, China, Japan, Australia and New Zealand.
The earnings outlook is also improving, particularly in the United States. S&P 500 forward earnings have been reaching record highs for the last few months as the impact of low oil prices and the stronger United States dollar wash out. This series is highly correlated with Leading Economic Indicators, which again rose to a new cyclical high at the end of 2016.
In Europe, manufacturing growth in January was the best monthly gain since April 2011. January also saw the best employment gains in nine years as hiring accelerated in both the manufacturing and services sectors, driven by a sustained growth in new orders.
Japan’s manufacturing sector also grew in January at its sharpest rate in three years. Both production and new orders expanded at a robust pace, with a large part of new orders driven by foreign demand.
Figure 2. Global manufacturing indexes
Source: Forsyth Barr analysis, Yardeni Research
While some equity markets had a more subdued January, the last quarter overall produced a very healthy return from equities. Growth indicators and the implications of President’s Trump’s fiscal expansionary policies have emboldened investors. Forward earnings expectations have lifted, with some of the benefits of tax cuts and a reduced regulatory burden being key drivers. Sectors to benefit have been financials and industrials and in particular the energy sector following the end of the recession in oil.
In Australasia, Australian equities outperformed New Zealand over the last quarter. Australia has benefited from the rebound in the resources and financials sectors, while New Zealand’s market is still regarded as dominated by companies which are considered to be interest rates proxies. These companies are less attractive in a rising interest rate environment.
New Zealand’s core inflation rate picked up in the fourth quarter of 2016, with upward pressure reasonably broad-based. Annual inflation rose to 1.3%, with petrol prices and housing construction costs providing the largest lift to prices.
The Reserve Bank of New Zealand (RBNZ), however, does not expect core inflation to reach its 2.0% target until sometime in 2018. With the uncertainty around global trade and the increase in the New Zealand dollar trade-weighted-index back to near historic highs, the RBNZ is expected to keep the cash rate steady for most, if not all of 2017.
Figure 3. New Zealand core inflation measures rising
Source: Forsyth Barr analysis, Statistics, New Zealand Trade & Enterprise
* 25 bp (basis points) is equivalent to 0.25%
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