Opportunities emerge as the ‘Trump trade’ unwinds

As the future of new policies becomes murky, investors seek opportunities that are grounded in today’s realities

Opportunities emerge as the ‘Trump trade’ unwinds

The “Trump trade” has officially unwound in the global currency markets, reflecting investors’ fading confidence in Washington’s ability to pass growth-inducing legislation. After experiencing a post-election boost on the back of President Donald Trump’s victory late last year, the US dollar erased almost all of its gains as of May 17.1

While this week’s drop triggered dramatic headlines, my team believes that falling enthusiasm is creating an attractive entry point for investment opportunities based on real trends that we’re seeing today — not on inflated hopes for new policies.

The potential effects of a weaker dollar

It has been my team’s position for the past 12 months — contrary to most analysts — that the US dollar holds limited near-term upside potential. I believe our outlook for a weaker US dollar has room to run as interest rate spreads contract between the US and Europe. (See our previous blog, Expectations for a strong US dollar in 2017 may be losing currency.) So, as our weaker dollar forecast appears to be manifesting in the markets, what impact do we expect to see on stocks and commodities?

A potential boost for emerging markets and commodities. The US dollar has historically had a strong negative correlation to emerging market equities,2 which means a falling dollar may create a meaningful tailwind for commodity prices and commodity-related equities. In addition, a weaker dollar would likely boost economic and profit growth in the US, as well as stimulate cross-border lending by global banks as collateral pledged against local currency loans rises in value against the banks’ dollar-denominated liabilities. A weaker dollar also reduces the debt burden of many emerging market economies that often borrow in dollars to support local government spending. In other words, while violent currency moves tend to be disruptive, a moderately weaker dollar can benefit both domestic and global economic growth, in my view.

Support for value over growth. As shown in Figure 1, while the unwinding of the “Trump trade” has reconnected value stocks with their pre-election price trend, growth stocks have significantly more room to the downside if they follow the pattern of retracement we have seen in value stocks, currencies and interest rates. As a result, we believe growth stocks may be less supported as the markets reconnect to actual fundamentals (i.e., the resurgence of global industrial production, rising corporate profits and global economic growth) rather than the more ethereal potentialities of President Trump’s policy rhetoric.

Figure 1: Value stocks have reconnected with their pre-election price trend

Opportunities emerge as the ‘Trump trade’ unwinds

Source: Bloomberg, L.P. Data from Jan. 21, 2016, through May 17, 2017. Past performance is not a guarantee of future results.

Investors interested in these opportunities may want to explore these exchange-traded funds from PowerShares by Invesco: PowerShares FTSE RAFI Emerging Markets Portfolio (PXH), PowerShares S&P Emerging Markets Momentum Portfolio (EEMO), PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) and PowerShares S&P 500 Value Portfolio (SPVU).

1 Source: The Wall Street Journal, “Washington Tumult Jolts Stocks, Sends Dollar Lower,” May 17, 2017. Dollar represented by the ICE U.S. Dollar Index, which measures the dollar against a basket of six currencies. That index fell 0.7% on May 17 and was nearing its lowest closing price since before the US presidential election in November 2016.

2 Source: Bloomberg, L.P. From May 29, 2007, through June 30, 2017, commodities, as represented by the DBIQ Optimum Yield Diversified Commodity Excess Return Index, exhibited a -0.70 correlation to the US dollar, as represented by the US Dollar Index. Commodity-related equities, as represented by the Thomson Reuters CRB Commodity Producers Index, exhibited a -0.68 correlation to the US dollar Index over this same timeframe. All calculations use 90-day rolling correlations. Correlation is the degree to which two investments have historically moved in relation to each other.

Important information

Blog header image: Neophuket/Shutterstock.com

An investment cannot be made into an index.

The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap growth stocks.

The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap value stocks.

The MSCI Emerging Net Total Return USD Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The Bloomberg Dollar Spot Index tracks the performance of a basket of 10 leading global currencies versus the US dollar.

About risk

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund’s return may not match the return of the underlying index. The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the fund.

Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Commodities and currencies may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 100,000 or 200,000 Shares.

Jason Bloom
Global Market Strategist
PowerShares by Invesco

Jason Bloom is the Global Market Strategist representing the PowerShares family of exchange-traded funds (ETFs). In this role, Mr. Bloom is responsible for providing the overall macro market outlook across all asset classes globally, in addition to leading the team’s specialized efforts in commodity, currency, and alternatives research and strategy. He joined Invesco PowerShares in 2015.

Prior to joining PowerShares, Mr. Bloom served as an ETF strategist with Guggenheim Investments for six years and then River Oak ETF Solutions where he helped launch several funds focused on both energy and volatility related strategies. Previously, he spent eight years as a professional commodities trader specializing in arbitrage strategies in both the energy and US Treasury markets.

Mr. Bloom earned a BA degree in economics from Gustavus Adolphus College and a JD from the University of Iowa College of Law.

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