And the name of the game is: Sector Rotation

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“In last month’s column I stated that there is still money to be made in sector rotation. My word but that was a prescient statement!” – William Meyer

As we now all know the new wave of populism grew even stronger with the surprise win by Donald Trump over his rival Hilary Clinton in the race for the White House.

Volatility returned with a vengeance. Within the next 24 hours the Dow and S&P 500 were limit down (the maximum drop before trading is halted) only to reverse course and end the trading period 1% higher.  The market was becalmed for months and now at last there is excitement and action for traders.

Again investors need to follow the money. President-elect Trump has promised massive fiscal spending, the dismantling of Obamacare, large increases in defence spending, tough trade negotiations and a clamp down on immigration.

Obviously infrastructure and building material stocks will do well and industrial metal stocks are soaring. A.K Steel, U.S Steel and Century Aluminium are all up over 30%. Trumps’ proposed $1 trillion infrastructure plan and promised curbs on the importation of steel from China bodes well for these companies.

Indeed the Trump presidency is good for commodity prices in general and his policies are mostly inflationary – certainly the threatened 45% tariff on Chinese imports is.

Emerging markets were under pressure from a strengthening dollar but if Trumps pro-growth agenda succeeds this will be temporary and already inflationary expectations in developed markets is increasing.

On the other hand investors should not expect to much. The Trump team is untested and many of them are not Washington insiders and experts. Anticipated investment returns, in my opinion, remain low. There is a great competition for margin and returns and rising interest rates are negative for many companies.

Goldman Sachs agrees with this view. They expect only a 1% return on stocks for next year. Asian equities represent the best opportunity with an expected return of roughly 12%.

“Markets are starved for growth – visible in the eagerness with which markets seized on Trumps’ growth – focussed message.

US fiscal stimulus is a welcome growth and reflationary impulse and Republican control of congress gives such an agenda a good chance of being enacted. We will get higher infrastructure and defence spending. Reflation is the theme du jour and it is clear that tax cuts, infrastructure spending and defence spending – high on the agenda – are inflationary”.

Inflation is coming and investors must plan accordingly.

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