Is it too late to buy into the Trump rally?

It is an unnerving time for investors. Europe is troubled, although for now the stockmarkets have shrugged off the prospect of an Italian vote on leaving the single currency, and by extension a challenge to the EU itself.

The defeat of Italy's prime minister Matteo Renzi quickly wrecked any pro-European jubilation in Vienna, where the rejection of an extremist candidate for a ceremonial post was by comparison insignificant.

Other markets are also at crossroads. In November, US equities rallied sharply as optimism about president-elect Donald Trump's pledge to roll back regulations and lower corporate tax rates gripped sentiment.

Will US share prices continue their rise?

As we head into the Christmas period, US equities are at highly festive valuations. The price/earnings (PE) multiple of the S&P 500 is now around 24, well above its average of 19 for the past few decades.

So will the promise of de-regulation materialise, and has it the power to drive US corporate growth so strongly that share prices continue to climb?

It's better not to add to US holdings now; valuations are full and risk outweighs upsideObamacare, certainly, will be gutted, which will please many employers. Potential changes to trucking and transportation, energy and banking could also transform the outlook for these sectors.

In banking, for instance, Trump's transition team has already said it will do away with the Dodd-Frank Act in its entirety, including a provision that empowers the government to dismantle failed banks, and "replace it with new policies to encourage economic growth and job creation".

The new president takes up residence in the White House on 20 January, so we have a few more weeks to work out the impact of his plans. Overall it's probably better for now not to add to US holdings as valuations are full and the risks outweigh the potential upside.

Many fund managers seem to be pinning their hopes on Japan, sensing that the mandatory improvements in corporate governance are being embraced by company managements.

Driving up shares artificially in this way is a far cry from rises on the back of growing earningsThere has been a notable growth in mergers and acquisitions, share buybacks and dividend announcements as Japanese corporates set about blowing their mountainous cash piles.

The Bank of Japan's actions to boost stock prices by purchasing assets including exchange traded funds (ETFs), in an attempt to boost consumer spending, seems to be working but at some point will have to be unwound.

And, though the market is relatively cheap, driving up share prices artificially in this way is a far cry from share price rises on the back of increasing earnings.

Emerging market growth

Growth in emerging markets has generally outpaced developed markets this year, but it is highly likely that markets have still underestimated the full economic impact of the new middle classes' spending power.

India's stockmarket is up more than 5% year to date and is one of the fastest-growing economies in the world, with gross domestic product growth expected to come in at 7.6% in 2016.

What's more, if the Trump factor spurs faster growth in the US, US companies will arguably want to use these revenues to tap into the potential in emerging markets themselves.

There is almost nowhere in the bond market you want to be at current pricing levelsThere are general elections in Holland, France, Hungary and Germany in 2017. It will be a year when geopolitical issues and political uncertainties could reignite global risk aversion at any time.

However, if good opportunities in the equity markets are scarce, there is almost nowhere in the bond market you would want to be at current pricing levels.

For investors such as the retired who need to buy bond-like exposures, one exception could be a fund specialising in floating-rate bank loans, whose interest payments rise with inflation; and Treasury Inflation Protected Securities (TIPS), whose principal rises with consumer prices.

Playing it cautious

These funds, which invest in syndicated loans made to below investment-grade companies, are also known as floating-rate, senior-loan, or leveraged-loan funds, and are currently attractive compared with junk bonds in that they have relatively little exposure to the energy sector.

For cheap access in the exchange-traded fund (ETF) market, the biggest play is PowerShares Senior Loan ETF.

However, we are going to be even more cautious and invest some of the portfolio's cash into the Polar Capital Global Insurance fund. This specialises in the unloved financial sector, which has been tarred by concern about some of the big investment banks and problems in the Italian market.

Insurance companies are a lot less volatile than the banks and have visibility in their underlying books of business. The fund, which has a wonderful long and short-term track record under Nick Martin and Alec Foster, tends to focus on the medium-sized cap space.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.