Global equity investors are doubting whether US President-elect Donald Trump's policies will sustain a sharemarket rally after being left disappointed by a lack of detail about his plans to cut taxes and increase spending from his first press conference since the election.
The S&P;/ASX 200 Index posted a modest loss of 0.08 per cent on Thursday, only the second negative session of 2017, after a lacklustre response in US stock markets to Mr Trump's eagerly anticipated outing. The lack of policy detail anticipated by bullish traders weighed on the US dollar in a volatile US trading session, pushing the Australian dollar up by more than 1¢ against the greenback to US74.70¢.
"The press conference wasn't particularly illuminating and that's probably the biggest disappointment," said Morgan Stanley investment strategist Ewa Turek.
Ms Turek said that given the lack of detail, it's not clear which policy initiatives Mr Trump will start his presidency with.
"If Trump leads with tax reform that is not going to put pressure on trade that will be positive for markets, but if he leads with protectionist policies – such as border adjustment taxes – that will send a different message."
Westpac market strategists described Mr Trump's news conference as a far cry from the market-friendly, pro-growth "presidential" comments he made when he accepted the election victory on November 9.
"Deregulation, tax cuts and a modest bump in infrastructure spending is almost certain to take place under a Trump administration, even though it received short shrift," Westpac analysts said in a note to clients.
"The issue is that markets arguably priced in too much reflation without any solid policy detail."
Westpac listed several questions for which the market is seeking answers such as the size, mix and riming of fiscal easing, the size of the infrastructure spending, whether US corporations will benefit from tax repatriation holiday, whether he will introduce border adjusted taxation, what his policy on the US dollar will be, and whether he will name China as a currency manipulator.
Perpetual global equities manager Garry Laurence said Mr Trump's win triggered a rotation out of expensive bond-proxies like utilities and consumer staples into more cyclical sectors like financial services and the auto-sector that were relatively undervalued.
"A lot of that rotation has now happened and that is why we are seeing a pause – the undervalued stocks have moved closer to fair value," he told The Australian Financial Review.
"They may have room to run further but markets are now taking a step back to see what Trump does and what the US Federal Reserve does [with interest rates]"
Mr Laurence said the fund has trimmed some of its exposures to US bank stocks after a sharp rally in favour of cheaper technology stocks in US and Asia.
Other investors were also cautious after a strong rally in stocks.
Wingate Global Equities portfolio manager Chad Padowitz said "we are in the very latter stages of the bull market" that began in February 2009 but that the "last moments tend to be the best."
A few things have gone well with Trump winning the election and better PMIs [manufacturing data]."
But, he said, three indicators are at elevated levels – corporate profit margins, valuations and debt levels, which have historically flagged market corrections.
"Two out of three are bad, and three out of three are terrible."
Mr Padowitz said the impact of infrastructure spending has likely been overstated and is minuscule compared to China's public spending.
The prospect of lower taxes and reduced regulation was, however, a positive for stocks but he was more concerned about the high multiples attached to global stocks.
"You can't hide away from high valuations leading to lower equity returns and that's irrespective of government policies."
Mr Padowitz also points to a flaw in the thesis that President-elect Trump will be good for the stock market.
"If profit margins go up, labour is worse off and he got elected in the states [where labour was dissatisfied]. I can't see how profit margins go up if he delivers on his policies."
One sector that was sold off aggressively during Mr Trump's press conference was healthcare as the President-elect said drug companies were "getting away with murder".
Mr Padowitz had also profited from a recent gain in US bank stocks but said he's buying healthcare stocks – which he regarded as relatively cheap.
Morgan Stanley Wealth Management's Ms Turek was more cautious on healthcare stocks. She said that even though equity valuations were high, strategists have been warning about this "for some time" even as stocks made further gains.
"If you look at other factors such as credit spreads and financial conditions – they are still supportive of equities," she said.
"Even though we are towards the latter stages [of the cycle], late-cycle indicators are still far from extremes and inflation expectations are still below historic levels.
"Until we start seeing those indicators signalling tighter financial conditions we would be long equities."
Mr Laurence said that an increase in government spending would support economic growth.
"That will lead to a pick up in inflation and plenty of companies that will do well and grow in that environment."
He said 2017 will be about waiting for opportunities rather than chasing the market and that as US quarterly earnings season begins "the focus should come back to the companies themselves and corporate fundamentals".
