Cormac Weldon  and Stephen Moore Fund managers

• Earnings return to growth: the forecast is in double digits.

• Domestically-focused stocks set to bene t the most from Trump’s proposed policies.

• The trajectory of interest rates is a potential risk.

Donald Trump’s surprising victory in November proved the pollsters wrong once again. The market’s reaction to it also went against predictions: in anticipation of scal stimulus and lower corporate taxes, share prices rose sharply. The rally was led by cyclical areas which would be bene ciaries of stronger growth and higher consumer spending. Meanwhile bond yields rose and the yield curve steepened as expectations for rising in ation increased.

We believe that the cyclical upturn seen since the election is likely to continue into next year as we learn more details about the President-elect’s pro-active scal policies. The proposed reforms to corporate tax are expected to add between $5 and $10 to forecast earnings of about $125. This will mean that earnings growth for the S&P 500 is in double digits after three years of no growth.

The trajectory of interest rates is another potential risk. If rates were to rise more quickly and aggressively than is predicted, this would have a negative effect on the market. While we expect interest rates to increase, we are not anticipating too much of

an impact on the housing market as demand still appears to be strong. Nevertheless, it will be an area to watch. On the positive side, a rising rate environment is good for the banking sector.

We are maintaining our negative stance on ‘bond-proxies’. We expect the reversal of what had been strong performance of bond-like stocks in sectors such as consumer staples, telecommunications and utilities to continue. As interest rates rise, these stocks will suffer.

Even if the dollar strengthens further, we still should see healthy growth in earnings.

“We expect the reversal of what had been strong performance of bond-like stocks in sectors such as consumer staples, telecommunications and utilities to continue.”

Given Trump’s rhetoric during his campaign, the big unknown
is what is going to happen to global trade. While the long term implications of increased protectionism are negative, in the short term they could be positive for the US economy. In general, the policies so far announced are positive for more domestically- orientated companies. This is an area that we have increased
in the portfolios lately. Small and mid caps tend to have more exposure to domestic earnings (Fig. 3).

Elsewhere, we expect wage in ation to continue and that
will have a negative impact on corporate pro tability. It will particularly affect labour intensive companies such as restaurants and retailers.

At the moment the US market is trading on p/e multiples that are above average relative to its history. This creates some risks on the downside, although the forecast growth in earnings is positive. The question ahead of us is how sustainable the upturn will be.

The announced
spending on
infrastructure will also
be positive but we
have to be mindful that any delay in the implementation of the programme - or a smaller budget than has been announced - will have a negative impact. As Republicans in general are not in favour of this increase to spending, and government debt is already high, the risk of disappointment is real. We are mindful that the proposed stimulus is being considered for an economy which has already undergone a very long expansion. We are at or close to full employment with wage in ation picking up and a President-elect who talks extensively about protectionist trade policies (which are also in ationary).

Figure 3: Small and mid caps have more exposure to domestic earnings

120% 100% 80% 60% 40% 20% 0

Peter Saacke and Raheel Altaf Fund managers

• Sentiment towards emerging markets turned positive in 2016.

• Value stocks have come back into favour.
• Fundamentals of emerging companies are improving.

Has it turned? 2016 has been a good year for emerging market equities. The ve preceding years were not. Indeed, at the start of 2016 sentiment towards emerging markets was particularly low: commodity prices had been falling, currencies were weakening, the economic outlook appeared fragile and there was political uncertainty in a number of major developing economies. Accordingly, the consensus was to be underweight emerging markets.

But 2016 proved to be a year where those willing to take risk
and go against the trend have been rewarded handsomely
(Fig. 4). Commodity and oil prices rst stabilised and then rebounded, prompting a sharp reversal in performance for the energy and resources sectors. Economic news ow has also improved: China’s predicted banking crisis has so far failed to materialise; India has maintained robust economic growth; and Russia and Brazil appear to have passed through the worst of their recessions. More broadly, there are signs of a synchronised global cyclical upswing. For the rst time since 2014, PMIs in the US, Europe and China are signalling expansion at the same time.

We think the chance of these stocks continuing to be rewarded
is a risk worth taking. We currently see the most interesting opportunities in cyclical areas such as industrials, construction, resources and energy. We are underweight more defensive sectors and have less exposure to ‘expensive growth’ areas such as consumer discretionary, healthcare and staples than many of our peers.

The rally in emerging markets was initially con ned to companies sensitive to commodity prices. But as economic data has stabilised over the course of the year, the recovery has broadened out to other cyclical areas of the market. As the outlook for economic growth has improved, the scarcity premium attached to growth stocks has diminished and value (cheap) stocks have come back into favour

Risks to the recovery remain. The last month has been a stark reminder that sentiment towards emerging market stocks continues to have a close link with concerns of a faster normalisation
of interest rates in the US via a stronger dollar. While political uncertainty has diminished in some areas, a new concern has arisen around agreements on global trade. The main threat on
this front emanates from the US. If the US President-elect follows through with his more protectionist campaign proposals and tries
to limit free trade, this could have a serious impact on global equity markets in general and emerging markets in particular.

While we remain vigilant to
these risks, we are inclined
to act on actual policy rather
than campaign rhetoric.
Despite enjoying strong gains
this year, emerging market
equities are still attractively
valued relative to their
developed market peers and
investors remain underweight this asset class. Moreover, there’s evidence that the fundamentals of emerging market stocks are improving: a recovery in pro t margins and improving returns

on equity mean that earnings growth is forecast to be higher in emerging markets than in developed markets. Cheaper starting valuations and faster earnings growth can make for a powerful cocktail for stock returns. We are thus optimistic about the outlook for emerging market equities.