The outcome of the US presidential elections was among the biggest surprises of 2016. Initially, the financial markets were duly unsettled, but the mood soon turned to euphoria, with the government being prematurely applauded for its plans to stimulate the economy with fiscal packages, tax cuts and deregulation. If the plans do prove successful, however, then reflation will probably remain the dominant theme in the markets for a while longer
It will also entail rising interest rates, along with sector rotation away from interest-sensitive stocks paying high dividends and towards cyclical stocks offering protection against inflation. Real estate stocks offer these very characteristics, but in recent years have been in strong demand as a substitute for bonds given their stable distribution yields. In such a scenario, the sector could continue to be adversely affected by outflows of funds until the fundamental data once again come to the fore. In stock market trading, it is often the case that what appears to be right course of action in fact turns out to be precisely the wrong one. Following this logic, it is not impossible that the real estate tycoon Donald Trump might bring a temporary halt to the rise in real estate stocks.
Author: Boris Pavlu, Asset Allocation Analyst, LGT Capital Partners