Financials and industrials have been notable climbers in recent days with Donald Trump’s US election success being perceived by markets as a sign that interest rates will rise.
However, Davidson, co-manager on the JPM Global Equity Income and Global Dividend funds, believes that on a short-term basis valuations in financials look stretched, making for a finely balanced opportunity set.
“If we look at the US equity market by sector, then we’ve got utilities, real estate, telecoms making up about 10% of the S&P 500 that will be challenged by rising rates,” he warned.
“Consumer staples making up about 10% and healthcare making up 14% are more of a mixed bag. But something like 35% of the US equity market now seems less relevant for a reflation trade and may flat line or go down.”
Given US equity outperformance in recent years, Davidson acknowledges the Trump outcome as a “game changer” for risk assets, but at a time when valuations are relatively high already.
“Going into the election we were positioned for the view that less than 5% US unemployment and 2% inflation meant we could expect to get a Fed rate rise in December and that would be to the benefit of a number of financial stocks,” he said.
“In the portfolio we have 15% exposure to global banks and a further 6% to insurance companies. Of that 15% exposure to global banks, 9% is in US banks alone.
“Financials have been basically the worst performing sector since the financial crisis, so dividend yields were already attractive not even accounting for expectations of a rate increase.”