Although Source analysts Andras Vig and Paul Jackson are “reassessing their enthusiasm towards the Trump administration” amid political risks in Europe that are ever present, the analysts remain positive on certain stock categories as they think the US might only see one more rate hike in 2017.
Trump rally may have lost steam, but one more rate hike is possible
In their quarterly update, “Fading the ‘Trump rally,’” Vig and Jackson note that, while the Trump rally may have “lost some steam” – the report was written before Thursday’s near 20 point advance in the S&P 500 – the US markets did put on a strong showing in the face of a Fed rate hike with analyst talk indicating more are on the way.
Source is expecting “decent but unexciting” growth of near 3% with inflation near that level. Markets may have gotten slightly ahead of their skis and are now playing catch up by taking a refreshing pause in March and early April.
From a monetary standpoint, Source thinks central banks will be generally more accommodative, particularly in Japan, the Eurozone and emerging markets. In the US, while many analysts call for another two if not three interest rate bumps, Source is only looking for one more rate hike on the year – unless, of course, growth picks up.
Source likes real estate and defensive food and beverages in the US
In the current market environment, Source favors selective risk assets, with their most preferred holding real estate, which they think will deliver the best returns over a one- and five- year time horizon.
Vig and Jackson like US-based late-cyclicals and a wide swath of European consumer discretionary issues. They recommend closing out their tactical Overweight in basic resources and replace healthcare, a top growth sector year to date, with food & beverage as a top defensive pick.
The most favored sectors in the US include construction, travel & leisure along with the defensive food & beverage pick. In Europe they prefer food & beverage and financial services. The least favored sectors in the US are basic resources and financial services and in Europe are personal goods, real estate and technology.
Looking across the global environment, Source is bearish on oil and most commodities with the exception of agricultural products. They are re-adjusting their positioning in fixed income, moving away from sovereign bonds that “do not offer an attractive risk-reward balance any longer,” downgrading the asset class to underweight.
For diversification, they like cash and don’t predict any major moves other than the US dollar strengthening against other world currencies.