I am writing this whilst sat watching the inauguration of Donald Trump, and very soon his first batch of executive orders will likely enact some sweeping policy changes. This will of course be just the start, and policy uncertainty should remain elevated given that the incoming administration has two competing policy objectives. The first is a pro-growth shift to ease the regulatory and tax burden on businesses, whilst the second is perhaps a less positive shift to reduce US engagement with the rest of the world through hawkish trade and immigration policies.
I’m not sure anybody can say with any certainty how this plays out for global stock markets, but the historically rich valuations of US Mega-caps, and what appears to be a consensus view that market returns will broaden out a little this year, could well begin a rotation into some of the less highly rated regions and sectors. Although it’s early days perhaps the FTSE100 is already starting to benefit from this, rising by just over 4% in January so far. It was given a boost last week by a slightly cooler UK inflation report showing that inflation was 2.5% in December, down from 2.6% the previous month, helped by falling hotel prices and a smaller than usual rise in airfares. Importantly, both core inflation and service sector inflation also fell.
The short-term direction of travel therefore seems supportive of another rate cut from the BoE at the February meeting which could take some of the pressure off Rachel Reeves whilst also providing a boost to companies. Whether it will be enough to offset the surging costs faced by many of them in the wake of the October Budget is still up for discussion.
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
