The policies enacted by 'populist' President Trump could see value approaches come to the fore following a decade of growth bias in the US market, says Chuck Cook
Defined as an ideological movement that says citizens are being disadvantaged and mistreated by a minority privileged elite, it is easy to see why populism has been on the rise.
In the US, real wages for middle and low-wage earners have been stagnant for over a decade, yet the top 5% of earners have seen a significant rise over the same period. This has also coincided with the post-financial crisis recession and the slowest recovery from a recession in close to 100 years.
Populism was seen as one of the key drivers behind the election of President Donald Trump in 2016, but it is not solely the US that has seen it rise - support for such parties has increased over the past 15 years in a number of countries.
Changes in the type of manifesto individuals are elected on can bring changes in policy, which in turn impacts stock markets.
Now we have a ‘populist' president with different policies and methods of communicating with the electorate. He is seen as controversial, but despite his style and approach, he has been successful in getting some of his key policies enacted. Apart from Obamacare reform, he has succeeded in lowering the corporate tax rate, allowing US firms to repatriate earnings at a low tax rate, and commencing regulatory reform.
We view the majority of his headline policies as pro-growth, pro-business and therefore see opportunities in the US market. When looking at opportunities we take into account three main factors: attractive valuations, strong fundamentals and business improvement potential.
We believe there has never been more value in value. Over the past decade - of around 1.4% GDP growth in the US - investors have tended to look for firms with growth in earnings and profits, secular growth stories. This has worked for them in a low growth environment. But there have been long periods where value has outperformed growth and investors shouldn't forget that.
In the lead-up to the dotcom bubble, growth outperformed value, then value outperformed when the bubble burst until the onset of the financial crisis. Since then growth has outperformed.
Such a dynamic creates some disparity in valuations: the priciest stocks became very expensive compared with the least expensive. We believe growth stocks will always trade at a premium to value stocks but there are times when this gets out of hand - this tends to be during times of secular stagnation and low interest rates.
That said, it is worth noting there have only been three periods over the past 90 years with such dramatic underperformance from value stocks, and we remain very confident that in 10 years we will have had very good performance of value over growth.
For more information contact:
Kenneth Tomlin, head of UK Institutional Business at [email protected]
Chuck Cook is a strategist at The Boston Company Asset Management (TBCAM)1, part of BNY Mellon Asset Management North America Corporation2
1. Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
2. Effective on 31 January 2018, The Boston Company Asset Management, LLC (TBCAM) and Standish Mellon Asset Management Company LLC (Standish) merged into Mellon Capital Management Corporation (Mellon Capital), which immediately changed its name to BNY Mellon Asset Management North America Corporation. TBCAM is a brand of BNY Mellon North America Asset Management Corporation.
