Equity Markets Looking a Little Expensive But Not Overpriced

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Emerging markets show signs of growth

From a wider perspective, there are increasing signs that the global economy is starting to get into a proper recovery mode. The emerging markets in particular are showing signs of growth, whilst generally easier monetary conditions are allowing for the paydown of debt, something which the steady rise of inflation could help further.

Meanwhile, fourth-quarter company earnings were, on the whole, better than expected on both sides of the pond. The first-quarter 2017 earnings which will be reported over the next few weeks will be scrutinised to see whether companies are holding up their side of the bargain with the strong earnings and profit growth they have been showing of late.

Equity Markets are beginning to look a little expensive on historic valuation terms, but not overpriced. By the same token, much of what has been priced in has yet to be delivered, such that sentiment will remain fragile until some tangible benefits begin to wash through. There is also an increasing feeling that markets may have risen too far too fast – virtually in a straight line to new record highs in recent months – such that some sort of correction is inevitable if the news flow disappoints.

By the same token, in this era of historically low interest rates and accommodative monetary policy, there could yet be much to go for and, in any event, with many of the fundamentals intact, any such market correction could actually present a buying opportunity on the dip.

Trump election promises

There is little question that sentiment remains positive that Trump’s agenda will be pro-business, with election promises of infrastructure spending and tax reforms turbocharging the main US indices. As things stand, however, details on either remain sparse and there is an additional complication.

Trump’s promise to repeal and replace the Affordable Care Act – commonly referred to as “Obamacare” – was pulled from the voting schedule in the House of Representatives on Friday (24 March) when it emerged that Trump could not get enough Republican support for the measures.

At a time when the president’s political capital should be at its highest, any failure to deliver on this major reform would inevitably cast aspersions on his ability to follow up with the other reforms the market has been so eagerly anticipating.

This in turn would be negative for sentiment and would no doubt see markets giving up some of their gains.

Donald Trump makes so many promises to collect votes in Election 2017

Donald Trump makes so many promises to collect votes in Election 2017

On the other hand, the bulls would point to some of the market rises being down to a lack of negatives in those election promises. This is a contrarian way of thinking which boils down to the lack of “non-negatives” – that is, one of the reasons why companies have been reluctant to invest in their own businesses over the last few years has been a fear of ever increasing regulation and red tape, as well as the unknown possibility of tax hikes around the corner.

As such, the argument goes that even if the reforms Trump wants to get through are not delivered, the very fact that he is attempting to do so is enough to show that there should not be any further regulation or tax increases to come. This has somewhat reignited the “animal spirits” in the US for both company bosses and investors alike.