Head - NAM Investment Strategy
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Investors should look for markets to anchor to fundamentals including a healthy economy, growing profits and the Fed slowly raising interest rates
For the US midterm elections, voter engagement spiked and when the results were announced pollsters were finally able to exhale following 2016’s Presidential election surprise. In the end, Democrats picked up enough seats in the House to gain control with several seats being counted while the Republicans added at least 2 more seats in the Senate to maintain their majority. Now that the election is over, investors should look for markets to anchor to the fundamentals which include a healthy economy, growing profits and a Fed that is slowly raising interest rates
Following tax cuts and deregulation, US large caps’ expected long-term earnings growth has caught up with small cap stocks which, in turn, have also seen their higher debt burdens impair relative performance as rates have risen. As we advance deeper in the business cycle we encourage investors to upgrade the inherent quality of their portfolio holdings. Large caps are less volatile than small caps and dividend growers have historically performed competitively with less risk than the market at large. The Citi Private Bank Global Investment Committee (GIC) also looks to take advantage of the opportunities provided by less exhausted bull markets trading at deep valuation discounts and higher dividend yields than US stocks. In addition to solid risk-adjusted performance and high dividends, infrastructure stocks have been less sensitive to trade developments given the relatively domestic nature of many physical and digital investment projects.
The Fed tightening cycle underway will turn three years old next month. We look for another rate increase in December and gradual tightening next year. By contrast, the European Central Bank (ECB) is not expected to raise rates until after next summer. As a result, we side with short-duration, high-quality US bonds, high yield, floaters and bank loans versus low yielding developed country sovereigns with emerging market debt also deemed attractive
Following the midterm elections, investors will still need to navigate trade rhetoric, Brexit, central bank developments and a host of other issues. Enduring portfolios that look beyond borders to capture favorable fundamentals and valuation readings can help investors chart their course as these and other events unfold.
Clients can read our full thoughts on the North American markets in North America Investment Strategy – Investing after the Midterms.