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US equity funds first off the mark

10 January 2017

Trump's economic plans have reinforced a positive US equity outlook

Read more: Trump stocks equity investment

Investors started off the New Year by moving into US equity funds for the seventh time in the nine weeks since Donald Trump’s election victory.

Stats from Deutsche Bank show equity fund positioning has been rising in the first week of 2017 from underweight to neutral after modest outflows in the last two weeks of December.

Both US mutual funds and long-short equity hedge funds are now overweight financial stocks, materials and consumer discretionary.

Trump’s agenda revolves around broad-based deregulation, corporate tax reform and infrastructure spending to stimulate economic growth.

His plans have reinforced a positive US equity outlook and a strong performance of developed market stocks since his surprise election win in November.

This trend has extended into 2017 and on Monday the Nasdaq composite notched a fresh record high while Tuesday saw the UK’s FTSE 100 finished at a ninth consecutive record level.

Despite concerns over Trump's promises to rip up trade agreements and costly immigration plans which could slow economic growth, US earnings growth is expected to rise sharply by year-end 2017, with financials expected to be among the biggest winners.

Dennis Jose, equity analyst at Barclays, warned this week that earnings, not elections, should be the dominant driver of equities in 2017.

Meanwhile developed market bond funds and emerging market mandates (both bond & equity funds) have been held back on rising inflation expectations for the former, and fears of a strong dollar and trade protectionism for the later.

Short positions in bond futures have risen further into record territory.

David Folkerts-Landau, group chief economist at Deutsche Bank, reckons Trump’s economic plan is a "game changer" for the US.

"This makes us very bullish US growth," he wrote in a note to clients this week. 

"Fiscal stimulus and broad-based deregulation are expected to jolt the US economy toward a long-term equilibrium of higher growth, inflation, and interest rates."

"While Trump introduces higher uncertainty, this is better than the near certainty of the continuation of a mediocre status quo."

More importantly, Folkerts-Landau believes that the election of Trump as the 45th President of the United States will fundamentally re-order the economic, financial and security arrangements of the post-WW2 era.

"We believe that these changes will have a significant impact on the economic performance of nations, industries and corporates across the globe."

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