Socially responsible screens could prevent NZ investors from exposure to growth generated by the one major US government-spending item likely to pass muster, according to Greg Fleming, AMP Capital head of investment strategy.
Fleming says with President Trump’s promised healthcare – defeated last week in the US Senate – and infrastructure spending plans stalled only the military budget remained on track.
Last week the US House of Representatives approved military spending for the current budget period of almost US$660 billion – representing an increase of over US$68 billion compared to the previous fiscal year and US$18.4 billion more than Trump originally requested.
“We are not exposed to the military sector because of our ESG [environmental, social and governance] screens,” he says.
AMP Capital NZ – along with a host of other managers including ANZ and Westpac – have cut exposure to weapons manufacturers over the last year or two. In March AMP Capital (across Australia and NZ) introduced a new “ethical framework” scrubbing tobacco from its portfolios as well as extending the weapons ban to Australian-domiciled funds.
Fleming notes in the latest AMP Capital NZ Quarterly Strategic Outlook that US businesses were growing increasingly frustrated by the flailing Trump legislative agenda.
Citing a survey by global consultancy firm Accenture, the AMP Capital report says US business leaders were looking for progress on “healthcare reform, tax reform, trade reform, and anything linked to increasing infrastructure investments”.
“They also expressed [in the survey] the view that in all crucial respects, none of these are yet enacted or properly detailed as at the end of June, and so ‘are still in this zone where businesses are still waiting’,” the AMP Capital report says.
In fact, politics – including the upcoming September NZ election – represent probably the biggest current market risk against a generally benign economic backdrop, Fleming says.
The AMP Capital Outlook says global growth appears to be stabilising at about 3.5 per cent with a return to the higher pre-GFC rates unlikely.
“Improving economic growth around the world will generally support equities and challenge bonds, because this growth is more ‘traditional’ in nature – arising from better employment and demand and thus allowing prices and potentially, profits to rise,” Fleming says. “An additional traditional growth source – capital spending and business investment – should also kick in over the next two years.”
However, AMP Capital is keeping its powder dry with a continued overweight holding of cash – sourced by a reduction in bonds.
During the June quarter the manager also reduced developed market equity weighting to neutral, in line with its Australasian and emerging markets exposures.
“Portfolio positioning is thus now slightly more defensive, due to the reduction in global equities following on from earlier reductions to allocations to property and commodities allocations, which we consider the most vulnerable asset classes at present,” the AMP Capital report says.
As well as neutral stance on equities and property, AMP Capital remains underweight both global and NZ bonds while going above benchmark only on cash, foreign currency and “alternative growth” assets such as infrastructure or commodities.
The manager has also recently trimmed its Australian equities holdings in exchange for NZ shares within the AMP KiwiSaver diversified funds.
“New Zealand now appears more likely to retain the gains achieved in the first half, although it should be noted that there is very little value (on conventional measures) left in either of the markets of our home region,” the report says. “In addition, the longstanding yield advantage on the New Zealand equity market has diminished on a trailing basis during the last year. A mildly contracting yield advantage is offset at present by a more robust economy and earnings outlook in the key sectors which dominate the New Zealand market.”