Investment Desk Bulletin

29 November 2016

Equities: All change or not?

IDB 29 11 16

By Roger Jones & Petra Posnikova

In this week’s IDB, ‘All change or not?’ we consider the relationship between bonds and equities, look at equity behaviour in the months following previous US presidential elections and dig into equity market performance since Trump’s victory.

- There is a strong positive historical relationship between bond yields and equities. There are periods where this relationship breaks down, but in the long-term stock prices and bond yields rise and fall together. It is also notable that when US bond yields rise and the US Dollar strengthens, developed markets typically outperform emerging markets.

- The trends in US equity markets following US Presidential elections are far from clear, based on analysis of the last 22 elections. On average, markets experience a pull back two months after the election and somewhat surprisingly, markets performed better when a Democratic government was elected versus a Republican. There has been no apparent trends in sector performance.

- As we highlighted last week, investors have been quick to emphasise the potential economic positives of a Trump policy agenda and discount the negatives. This positive sentiment has reinforced investor rotation, helped cyclically sensitive stocks outperform defensive equities and narrowed the valuation gap. Sector earnings momentum and valuations do not currently offer a clear picture, therefore we will continue to focus on opportunities at a stock specific level when selecting investments.

Please click here to view the presentation.