Markets in 'wait and see' mode as Trump settles in
"Buy the election, sell the inauguration", mentioned in this column last week, appears to have been the preferred trading strategy - at least on Wall Street.
The reflation play founded on hopes of large fiscal stimulus from the incoming administration seems to have floundered over the past three weeks. Except for the Nasdaq Composite, the major indices fell.
The other theme featured here previously was this: If the Trump administration starts a trade war, then it is probable that Asian markets will decouple from, or at least reduce, their reliance on Wall Street.
Following Friday's inauguration speech by Mr Donald Trump, where he emphasised that he will place America's interests ahead of everything else, a decoupling in the months ahead now looks increasingly likely. Still, without any specifics, it is difficult to say with any certainty.
After a large run-up following the Nov 8 elections, the US market received a hefty dose of reality when Mr Trump, in his first press conference since Nov 8, failed to say anything about his approach towards managing the economy, prompting investors to pull back until greater clarity unfolds.
Add to this the speech made by US Federal Reserve chair Janet Yellen last week on full employment and inflation targets, and the obvious if unsaid message regarding interest rates, maybe the market's behaviour isn't that much of a surprise.
As we noted in this column a fortnight ago, markets had to eventually switch to "wait and see" mode because of the uncertainty over what Mr Trump might do.
In this connection, it's interesting to see that famous hedge fund manager George Soros thinks that the rally is over. "Uncertainty is the enemy of long-term investment," Mr Soros told Bloomberg last week.
"I don't think the markets are going to do very well. Right now they are still celebrating. But when reality comes in... bets against the market will prevail... It is impossible to predict exactly how Trump is going to act, because he hasn't actually thought it through."
A similar sentiment has been articulated by other observers. The consensus view so far is that there seems to be no coherence in the strategies emerging from the Trump camp, other than chest-thumping rhetoric.
While an anti-trade and protectionist US under Mr Trump would be bad for financial markets ahead, Credit Suisse in its Investment Monthly made the point that to some extent, Asian financial markets have already priced in potential trade friction risks because Asian equities underperformed global markets by 7.5 per cent in 2016 after the US elections.
"Beyond the potential trade risks, the macroeconomic story for Asian equities remains robust with signs of stabilisation in the Chinese economy as reflected in the recent macroeconomic data," said Credit Suisse.
"Robust exports data from Taiwan, South Korea and Singapore also indicate that the cyclical recovery in external trade continues to gain pace. While market valuation appears fair on a standalone basis with the MSCI Asia ex-Japan Index trading at a P/E 2017E of 12.9, the region is the most attractively valued within the emerging markets space and is trading at the lowest premium to the latter versus the historical average."
In other words, unless there is major upheaval on the international trade front, there is some hope for stocks in this part of the world because there is some growth.
Investors can expect markets to stay in "wait and see" mode for the next few weeks, still tracking Wall Street for direction but hanging on to every economic utterance from the White House.
A decoupling may be the eventual outcome but this is not assured - yet.
This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts