Outlook 2017: US small & mid cap equities
It remains to be seen what President-elect Donald Trump will actually do but his victory does seem to argue for investments in more US-centric parts of the market. We do believe he will achieve many of his goals but they seem to be close to fully priced in.
- There seems to be a general belief that the pall of Hillary Clinton’s hostility to drug prices is gone and GDP growth will be higher under a Trump administration
- Wall Street tends to get ahead of itself at times and this appears to be one of those, so while we believe Trump will achieve many of his goals they seem to be close to fully priced in
- Mr Trump’s hostility to foreign trade agreements is troubling and while it remains to be seen what he will actually do his policies do seem to argue for investments in more US-centric parts of the market
Obviously the election results have had an impact on our outlook for 2017. We also note that the US stockmarket has rallied post-election, driving up biotech, pharmaceuticals and infrastructure related stocks. There seems to be a general belief that the pall of Hillary Clinton’s hostility to drug prices is gone and GDP growth will be higher than anticipated due to Donald Trump’s stated intention to lower taxes and spend on infrastructure.
Wall Street appears ahead of itself
This may all be true in the medium term. However, we would note that Wall Street tends to get ahead of itself at times and this appears to be one of those times. For us Corollary Number One is: “things take longer than you think”. The new president will need to assemble coalitions in Congress to achieve these goals, which leads us to Corollary Number Two: “things are often harder than you think.” We do believe he will achieve many of his goals but they seem to be close to fully priced now and they could take 9-18 months to accomplish. That leaves a lot of room for disappointment.
Healthcare (beyond pharmaceuticals) seems to be particularly problematic. Repealing “Obamacare” without replacement seems difficult-to-politically-untenable. Approximately 20 million people have been added to the health insurance roles; taking that away without another programme replacement seems unwise. How this will work out in practice is a big unanswered question that could take some time to gain clarity. We believe he will need some Democratic votes in Congress to achieve meaningful change in this area.
Trump’s election argues for US-centric investments
Mr Trump’s hostility to foreign trade agreements is also troubling. In a globally-connected world disruptions to our trade relationships could be damaging to us and our partners. It remains to be seen what he will actually do but it does seem to argue for investments in more US-centric parts of the market. This suggests small and mid-cap companies, where approximately 82% of revenues are domestically sourced. For large cap that number is about 65%.
On a more positive note we remain constructive on the primary and secondary effects of the continuing increase in demand for housing. The demand has moved from multi-family to single family which we believe is a function of developments within the “millennial” generation. This group was significantly hurt by the Great Recession, delaying the start of their adult economic lives as well as their family creation.
We began to see a change in the first element with an increase in multi-family housing demand in 2011. The millennials were moving out of their parents’ home as they become more secure in their job situation. Over the last two years we have seen an increase in the birth rate for this age group which we believe is driving the rising demand for single family housing. This boosts demands for a wide variety of products and services from heating and air-conditioning systems to doors and windows to washing machines to mortgage and property insurance services.
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