The potential increase in economic growth is probably greater with a Trump administration than if the Democrats had won, LGT strategist Mikio Kumada says in an interview with finews.asia.
Mister Kumada, the election of Donald Trump gave markets a boost. But now, the U.S. stock market seems rather expensive. Is it still worth investing in U.S. stocks?
Yes. U.S. economic growth has been in robust shape for quite some time now. Company earnings are up, and the deflationary influence of the slump in prices for energy and raw materials of recent years has waned, maybe even been reversed.
Add to that the fiscal policy (tax cuts, investments in infrastructure) as well as supply side measures (deregulation of the financial market). The potential increase in growth probably is bigger than it would have been if the Democrats had won the elections.
«The Federal Reserve will probably remain very cautious with rate increases»
It was particularly interesting to see how the Federal Reserve's intentions to tighten monetary policy stiffened only very marginally, which in effect meant that the monetary policy stance actually loosened. This is important because it underscored the reflationary effect of the above-mentioned factors.
All of this will of course become apparent in the earnings of financial and industrial companies, in particular in the cyclical industries. This puts the stock valuation gains in perspective. We believe prices are pretty fair for the U.S. and elsewhere partly even inexpensive.
Our fundamentally positive assessment of the U.S. economy already emerged before the U.S. election result and didn't primarily depend upon it. Should the Trump administration succeed in triggering additional growth, we will of course be more than happy about it.
The increases in interest rates will be decisive for the further development on the stock markets. What's your scenario for this?
As I indicated, the Federal Reserve will probably remain very cautious with rate increases. It will probably tend to signal that in case of doubt it will rather allow for a bit too much inflation rather than too little.
«This of course is a balancing act»
In the context of the current economic dynamic and sentiment in the markets, this probably translates into two to three rate increases this year. Should Trump actually proceed with very large tax cuts and extensive infrastructure programs, it could be even more.
The whole purpose of course is for the Fed not to entirely kill off the expected fiscal growth stimulus, by increasing rates faster and stronger, without loosing its credibility. This of course is a balancing act – but so far, the Fed has managed this quite well. The evidence for this is the concurrent increase of the dollar and U.S. inflation expectations.
Technology stocks, U.S. shares and dividend securities in Europe were in strong demand among investors in recent months. The Asian market remained in the background. Is it time to buy Asian stocks?
For Japan in principal yes, because expectations for higher U.S. growth moved the hitherto unfairly ignored reflation measures of the Japanese central bank and government more strongly into the focus of investors.
Stocks will profit widely – export industries as much as domestic sectors, such as banks and real estate firms.
«India could become interesting again following the recent correction»
In the rest of Asia-Pacific, we would encourage a more selective approach for the time being – with a generally neutral allocation. For the medium and long term, there are however attractive stocks in many different sectors to be found, both of defensive character – such as in health care – as well as among cyclical consumer stocks, as well as among exporters, tech and semi-conductor industries.
Exporters of raw materials will remain stable. Therefore, energy and raw material stocks shouldn't be ignored. India could become interesting again following the recent correction.
The entertainment, travel and education industries in countries such as China always are of interest. The same is true for gambling – at least for investors who have no ethically defined restrictions on such investments.
«A relatively big engagement in China remains important and meaningful in the long term»
Those who want to invest in Asia properly, with a long-term perspective and on a significant scale, should take the private equity vehicles into consideration. Cyclical macro trends play less of a role for those investments.
Does it make sense to invest in Chinese shares?
In the context of a sensible allocation of assets, a relatively big engagement in China remains important and meaningful in the long term. But we have our doubts whether this is the rate time generally to invest in stocks in China.
Part of the risk is a further weakening of the Yuan. Contrary to the cases of liquid zero-rate currencies of countries with highly developed, open financial systems, it is less easy and cheap to hedge against the Yuan currency risk.
Mikio Kumada is Executive Director and Global Strategist at LGT Capital Partners. He looks at economic topics from an international perspective. The son of Japanese-Greek parents grew up in Russia, Germany and Japan, studied in Vienna and worked in London and Athens. In 2002, he joined LGT and moved to Asia in 2008.
If he is not analyzing or commenting on the financial markets, he is exploring the many subtropical trails in and around Hong Kong. You can also follow him on Twitter at @Mikio_Kumada.
