JPM: Reflation trade splits S&P 500

Added 18th November 2016

More than one-third of the S&P 500 will be adversely hit by the reflation trade amid a “violent rotation” in equities, according to JP Morgan’s James Davidson.

JPM: Reflation trade splits S&P 500

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.”

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Gary Shepherd

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Gary joined Last Word Media in 2009, becoming editor of Portfolio Adviser a year later. Previously, he worked at Incisive Media with roles across its Professional Adviser, Investment Week, Bloomberg Money and Mortgage Solutions titles. Gary has been shortlisted for various awards, winning Headline Money Investment Writer of the Year in 2010.

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