Guy Barnard, Co-Head of the Global Property Equities Team, provides his reaction to Donald Trump’s unexpected election as the next US President. The team continues to see healthy real estate fundamentals and remains focused on bottom-up stock selection to drive returns, while pursuing investment opportunities created by market volatility.
Donald Trump’s surprise victory in the US presidential election has fuelled a market rotation that had already begun earlier away from defensive income (bonds and yielding equities), into more cyclical areas of the market that are expected to benefit from fiscal stimulus, steepening yield curves and rising inflation. This reflects a growing market narrative that monetary stimulus has reached the limits of its effectiveness and governments will increasingly be forced to pursue growth measures, regardless of budgetary impact.
President-elect Trump: key questions
Clearly the Trump victory, following Brexit, highlights the wide disconnect between the voting populous and mainstream political parties. It, therefore, focuses investor attention on upcoming elections in Europe and the Italian referendum where we can expect voter discontent to also become clear. This, and the wider implications of a Trump presidency could have far reaching geopolitical consequences; but it is too early to try and draw conclusions.
Similarly, it is far too early to tell if Trump’s high-level guidance on policies translates into reality and whether his proposed stimulus can meaningfully boost US growth. Despite the Republicans controlling both the House of Representatives and the Senate, the lead in the Senate is slim and it is not a foregone conclusion that they will have the votes to increase fiscal spending meaningfully.
We also question whether this can reverse the longer-term structural issues which have dampened global growth and inflation during the past decade and will be equally relevant in the next (such as demographic trends, technology, globalisation, productivity and excessive debt). However, it seems likely that the current market narrative has further to run, particularly given the budget process in Congress will not begin until next April.
Property demand still robust
Our views, therefore, remain balanced. While we accept that the short-term performance of property equities will continue to be driven by bond markets, we still believe that investor demand for physical real estate, a real asset with an attractive and growing income stream, will remain robust. The current spread between property and current bond yields remains wider than historical averages and we have not seen the excess in property markets that typically signal a significant correction is likely. However, we are late in the property cycle and, therefore, focusing on those markets and companies offering top-line growth potential remains key.
From a positioning perspective, events such as Trump’s election reinforce our view that limiting top-down investment calls in the current macro environment is prudent. We did reduce US exposure marginally in the few days before the election. While we see value in US real estate investment trusts (REITs) following the sell-off in recent months, the same is true in other global markets, such as Australia and Germany, which have also suffered from the same equity market rotation.
We will, therefore, likely continue to adopt a neutral regional stance, at least until the dust settles and we have greater clarity, focusing on bottom-up stock selection to drive excess returns. Market volatility has the potential to create opportunities at a sector and company level and we look to take advantage of this. Today, we believe many stock prices do not reflect the intrinsic value of real estate assets and the high-quality management teams operating these property companies. The market may ignore this for a while, but at some point we expect this value to be reflected in rising share prices.