View From the Top
Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
View from the very top: America has made its decision. Donald Trump is set to become the country’s next President. The initial reaction from financial markets will likely be highly adverse, but the reality is much more complicated. Not all of Trump’s previously proposed policies may actually get enacted, while those that do may not be unequivocally bad for the United States. At the least, however, investors should brace themselves for a period of considerable near-term uncertainty that could impact most conventional asset classes (equity and fixed income) particularly given current valuation levels. We continue to favour genuinely alternative and uncorrelated assets.
The outcome that many feared and few accepted could be possible has become reality: Donald John Trump is set to be the 45th President of the United States of America. In a year that has been characterised by the unexpected, the impact on geopolitics and financial markets of the election of Mr. Trump should be considered as at least as significant event as the decision by the voters of the United Kingdom to leave the European Union – and indeed probably even more notable. Politics may never be the same again.
However, there are two key points that are instructive from the UK experience and are equally valid when considering the likely reaction in financial markets over the coming days. First, it is important to remove emotional biases. And, next reality is always more complicated than the (generally hyperbolic) headlines might suggest. If we consider the initial of these considerations, although Mr. Trump may be justifiably disliked by many for his often highly objectionable views (particularly towards women and minorities), this is not to suggest that all his policies will be unequivocally bad for the United Sates. Moreover, it should not be forgotten that some 60m Americans did choose to vote for Mr. Trump, even if this could be considered in part a sorry reflection of the state to which US politics has sunk, with its lack of potentially better/ more suitable Presidential alternatives.
In terms of Mr. Trump’s politics, as we have previously discussed (see our notes of 10 August and 19 September for more details), they offer superficially the promise of change, even if that change has not been fully quantified. Broadly, under his Presidency, some taxes would probably be reduced and infrastructure spending almost certainly be increased. How precisely these latter initiatives will be funded remains far from clear, but such developments – which Hillary Clinton did also endorse – clearly ought to be supportive for helping to drive US economic growth prospects in some fashion.
Furthermore, many of Mr. Trump’s seemingly more controversial policies (such as potentially building a wall along the Mexican border or pulling the US out of a variety of trade agreements) need to be considered with a balanced perspective. Most politicians tend to moderate their rhetoric once they are in power in contrast to when they were lobbying from the outside. Also, do not forget that the timing of change is generally under-estimated; history suggests that most policies take longer to be practically implemented than is typically anticipated (even if Trump does have the support of Congress and the Senate).
Nonetheless, it remains unambiguously the case that financial markets dislike uncertainty and instability, or at the least, its prospect. It is very hard to argue that Mr. Trump creates greater certainty or stability for America/ the world than Mrs. Clinton would have done. At the least, Mr. Trump has made no secret of his desire to replace the Governor of the Board of the Federal Reserve, Janet Yellen, as soon as her current term expires (in February 2018) if not before, introducing further insecurity into the current investing environment. Moreover, now is a bad time for such an event to have occurred, simply because US equities are currently trading in their 90th percentile on almost all metrics relative to recent history (i.e. they are very expensive). Additionally, US Treasuries have enjoyed a bull market enduring more than thirty years, with yields currently close to all-time lows.
The natural reaction the prospect of President Trump would be for equities to sell-off and for Treasuries to outperform, given the latter’s status as a perceived safe-haven. However, things are much more complicated. As we noted in our previous research, some equity sectors (for example, infrastructure, defence, domestic energy plays) could benefit from a Trump Presidency, while others (such as export-dependent multinationals, big banks and renewable energy businesses) would similarly suffer. Meanwhile, Treasury yields may well rise on the prospect of the higher inflation that the President’s spending plans could invoke. Additionally, Trump also asserted in the past that he might seek to renegotiate the payment terms of US debt. Under all these scenarios, the US Dollar would almost probably rise (while emerging market currencies in general and the Mexican Peso in particular would weaken).
The broader uncertainty that a Trump Presidency does certainly induce – at least in the very near-term – clearly has ramifications not just for the US, but for the rest of the world, both in terms of politics and asset allocation. Even if investors have demonstrated a remarkable recent ability to dismiss adverse political events, we believe that America’s decision to elect Trump serves only to reinforce the case for investing in alternative and uncorrelated asset classes, a strategy we have favoured for some time. Furthermore, the potential uncertainty that politics has the ability provoke will remain a consistent part of the broader investment narrative for the foreseeable future. Within the next 12 months, three of Europe’s biggest economies (Germany, France and Italy) could find themselves with new leaders. All change? Brace yourselves.
Alexander Gunz, Fund Manager, Heptagon Capital
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