A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Donald Trump enjoyed his first real legislative victory as President this week as the senate passed a historic bill to overhaul the US tax code, for the first time in over 30 years. The vote, which ended 51-49 in favour of the tax plan, means the Federal Corporate tax rate will now fall to 20% from the current 35%, and taxes for middle-class workers will also be cut. The bill has drawn some controversy as it’s seen as bestowing huge benefits on US corporations and the wealthiest of Americans, while it is also estimated to add $1.5 trillion to the US deficit. This will cause apprehension for the working class, which is made more significant by the fact that US private sector employment increased by 190’000 in November, ahead of estimates. The S&P 500, Dow Jones and Nasdaq indexes all traded lower following on from the bill being passed, while the Dollar also took a hit.
The pound fell 0.6% to $1.3369 on Tuesday as optimism over a deal to move to the second phase of Brexit talks was overshadowed by the task of winning the backing of Northern Ireland’s Democratic Unionist party (DUP). Theresa May convened her cabinet to explain how a deal put forward on Monday had been blocked by the DUP, who rejected the possibility of ‘regulatory alignment’ for Northern Ireland with the EU after Brexit. The uncertainty surrounding the negotiations means the pound is still trading lower, at $1.337, as on Thursday 7th December.
Gary’s market comments in conjunction with our investment partners
Within their portfolios, LGT Vestra has exposure to US large cap companies through a passive Vanguard tracker which is blended with an active mid cap fund, run by Schroder. As a function of the constituents of the S&P 500, the Vanguard large cap tracker has a fairly ‘chunky’ exposure to tech stocks. By holding these two complementary US equity funds, LGT have benefitted from both the huge success of the tech trade which has played out beautifully this year, and over the much shorter term, they have benefitted from the move into cyclical stocks via the Schroder fund. They expect this rotation to endure as tax reforms continue to gain traction following on from the bill being passed through the US senate this week, but simultaneously remain positive on the outlook for technology as an equity theme over the medium term.
The 7IM team has begun its formal quarterly tactical asset allocation process to determine whether the portfolios need to be revised based on current market conditions and economic expectations. The process starts with a review of all the main regions of the world, looking at political and economic developments that could impact asset returns over the next 3-12 months. The team then draws up a set of forward looking scenarios that are presented to the Asset Allocation Committee, which consists of the 7IM investment team and external representatives, who provide expert insight into economics, financial markets and politics. The team then assess the probability for each scenario, and then overlay these probabilities onto forecasted returns to produce expected returns for each asset class.
Sources: LGT Vestra and 7IM