At the Expert Investor Barcelona forum earlier this week, local fund selectors proved sanguine about the likelihood of a market slump in the near future. More than eight in 10 Catalan fund selectors believe a correction in developed equity markets is not on the cards.
But it is exactly this (over)confidence that makes Nick Sheridan, manager of the Henderson Horizon Euroland Fund who was speaking at the forum, a bit sceptical.
“I honestly don’t know whether there will be a market correction,” he admitted. “But having said that: volatility indexes are at historic lows and the market has been trading into a Trump rally on expectations rather than reality,” he added. “We are in results season now and it looks like earnings are coming through pretty well, but everyone being so unconcerned makes me worry.”
While the question if the Trump rally will transform in a market correction is up in the air, it’s obvious that short-term volatility in some markets has created opportunities, for both long and short investors.
“If you put on your long-term hat as a fund manager, volatility is always your friend,” said Alan Nolan, a member of BMO’s global emerging markets team. “It can uncover interesting valuations for very good companies.”
The BMO team added to their Mexican equity holdings in the aftermath of the US elections, he said. “But after that you have to stay put. You have to look ahead because hopefully Trump won’t be president in five years’ time.”
US equities: not your Trump card
Henderson’s Sheridan also disagreed with the majority-opinion of Barcelona’s fund selectors that US equities are the asset class likely to profit most from Trump’s America First policy. Perhaps a little unsurprisingly considering he is a European equity manager, Sheridan believes Trump’s policy of promoting reshoring of jobs to America will erode the competitiveness of American companies.
“US companies have had such high margins because they have had lower wage costs. If they start to repatriate jobs, wage costs will go up and that will reduce operating margins. They may benefit from a non-operational perspective if Trump reduces taxes, but if you look at the EBIT line they are going to get hit,” Sheridan argued. “This could potentially lower the rating of US equities. So I disagree with US equities benefitting from a Trump presidency.”
