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.
23 December 2016
- 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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.