Fund managers are keeping an eye on infrastructure investment plans while European fund selectors’ faith in US equities has dipped again, after the Democrats won control of the House of Representatives in the US mid-term elections.
BNY Mellon Global Infrastructure Income Fund manager, Jim Lydotes, said the election outcome was supportive of a larger infrastructure programme as it was a topic both parties agreed on during the 2016 presidental election.
“We are not pegging our story to a huge revival of US infrastructure but with a better balance of power we could emerge with a legitimate infrastructure investment plan,” Lydotes said.
“With a better balance of power, even with a little bit of continued malaise in equity markets, a stable infrastructure plan can be a good way of invigorating the domestic economy.
“China has been doing this for 20 years. When the economy gets weak, the government stimulates it with fixed infrastructure investment, which in turn drives the economy. Perhaps the US could take a leaf out of that book.”
Fidelity International’s head of asset management for Asia Pacific, Paras Anand, agreed and said it was possible that a bi-partisan focus could move its attention on the need for domestic infrastructure investment.
Anand said the Democrat view on the budget deficit might change from opposition to tax cuts to spending on roads, hospitals, and airports.
“Any development in this direction would further spur the overall economy, continue to push wages in an already tight labour market, and potentially challenge the current expectations around the Federal Reserve’s activity for next year,” he said.
“Most political events have an underwhelming economic impact – could the US midterms prove the exception?”
Investment firm Titus Gesellschaft für Finanzdienstleistungen’s managing director, Stefan Schrader, told Expert Investor that infrastructure investments for oil and gas would increase dramatically over the next two years as it was a top political issue.
While Schrader thought investing in infrastructure through master limited partnerships (MLPs) he would not be able to at the moment as it was not part of his fund of funds investing universe.
“MLP returns are around 4-5% on an income basis and the market outlook is really positive because US politicians want to be independent from Saudi Arabia,” he said.
“In two years’ time the US will definitely be net exporting energy and for that they have to increase infrastructure and the pipelines as right now they are not able to deliver oil and gas resources to refineries and to the south of the US.
“If I could buy single equities I would think about buying MLPs.”
US growth slow down
However, Merian Global Investors fund manager, Nick Wall, said the Democrats might be reluctant to endorse an infrastructure bill that boosted Trump’s chances of re-election in two years.
“On trade, anyone hoping that the Democrats’ win will see a more moderate tone may want to think again – belief that China has engaged in unfair trade practices is not purely a Republican trait,” Wall said.
“There is a potential curveball though if Trump switches his focus to the economy and the stock market to win over moderates turned off by his aggressive campaign against immigration. In this scenario, there may be potential for a thaw in the trade war.
“In terms of markets, we believe that we are seeing the end of US exceptionalism and global growth can resynchronise – albeit at a lower level than in 2017, with outputs gaps shut and government spending no longer accelerating. The US is running large twin deficits, and textbooks suggest should lead to a weaker currency.”
On the flip side, Deutsche Bank chief international economist, Torsten Slok said a split Congress had historically meant a bullish equity market and he expected to see the same pattern again.
“Trade policy will be important for inflation, GDP, and for many individual stocks… And fiscal policy will matter for issuance of Treasuries and it could also matter for the level of long-term interest rates,” he said.
European fund buyers wane on US equities
However, European fund selectors did not feel the same way as US equity sentiment slipped back into last place as the least popular asset class, out of 26 in Q3, according to Last Word Research.
“US equities is one of those asset classes where a high level fund buyers – our respondents – are not aligned with the broader market,” the research said.
“US equity demand has slumped back down after the slight rise last quarter. However, the retail market has yet to stop buying.”
Luxembourg selectors were the only buyers that had a net positive sentiment towards the asset class and placed it 14th out of 26 in terms of popularity, compared to last place for pan-European selectors.
For pan-European selectors, 13% were looking to increase their US equity allocations over the 12 months to September 2019, 48% to hold, 33% to decrease, and 6% did not use the asset class.
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Source: Last Word Research
This is the first time since Q2 2017 that sentiment has changed the direction of travel to a downwards one.
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Source: Last Word Research
Munich-based Schrader said while he would be indirectly increasing his US equity allocation through global mandates he would not do it directly due to drawdowns.
“The prices have come down quite a lot but the US market is still one of the most expensive all over the world,” Schrader said.
During Q2, Schrader increased his US tech allocations but said this would now be rebalanced due to drawdowns.
“We will have at the end of next week have around 10% of allocation in US tech equities, now it’s less because this position had the biggest drawdowns since July,” he said.
Disagreeing, Amundi chief investment officer of US investment management, Ken Taubes said while he did not expect a significant immediate market reaction, fixed income markets could come under pressure if the president and Congress approved a new stimulative fiscal program.
“For equities, the historical precedent has been for markets to underperform ahead of the midterm elections and then rally until year-end. We expect this trend to be continued,” he said.
“After the midterm election, moving towards 2019, equity markets will shift their focus more to fundamentals such as earnings sustainability. The outlook is still positive for US equity in 2019, but with a strong focus on selection as the economic and financial cycles mature.”
