As already discussed in our previous blog postings earlier this year, the US stock market had rallied too much too soon on the back of promises from the new Trump administration regarding tax cuts, higher fiscal spending and deregulation. The new government’s failure to repeal Obamacare and introduce a new health care bill via Congress, coupled with their recent admission that tax reform and proposed corporate tax cuts would be delayed, have hit US stock markets and particularly sectors that stand to benefit most from the proposed new government policies. Furthermore, there is little clarity so far regarding the potential deregulation of the financial services sector. As anticipated, US financials have now given up almost 50% of their gains after the US election in November which fully justifies our decision to reduce our exposure to the sector until we get more clarity on the new administration’s ability to deliver on its promises. The recent pullback in US banks share prices makes the sector much more attractive from a valuation perspective, especially when taking into account the recent interest rate hikes from the Federal Reserve which are expected to boost US banks net interest margins and profits in the forthcoming quarters.
