Fidelity’s Bateman: ‘The biggest redrawing of global politics since the fall of the Soviet Union’

James Bateman
James Bateman

With 2016 the year of Brexit and now Trump, we may be witnessing the biggest redrawing of global politics since the fall of the Soviet Union, and perhaps longer than that. Yet unlike other revolutions and seismic shifts that have defined the current status quo, changes in 2016 have been driven by the most basic foundation of western civilisation, and the one most used to justify military intervention in the post-war period: democracy.

This dramatic move in the popular vote away from the status quo and broadly toward the category of ‘change, whatever that change is’ can be explained by two key factors.

First, governmental belief in and pursuit of globalisation and free trade is best described as a ‘you’ll thank me later’ policy. The problem with this is that, for the vast majority of the population, ‘later’ is simply an undetermined point a long way in the future (and one in which economists themselves have varying degrees of faith).

Second – and compounding the first factor – is that a major beneficiary of globalisation and free trade is the financial services sector, which stands accused of both causing the financial crisis. Those employed in financial services enjoy a high and improving standard of living whilst the remainder of the population have at best recovered to pre-crisis levels.

What does this mean for markets? If there is one word to summarise a Trump presidency, it is uncertainty – and if there is one thing risk markets do not like, it is uncertainty. So, to echo Trump’s Mexico solution, a Trump presidency may be a repeated climbing of walls of worry – a series of short cycles, but overall lacking much direction.

This may be an environment in which a static portfolio struggles to outperform, but it is one in which active management both on a tactical and underlying stock selection level can deliver real growth over the medium term.

In the very short term, a risk-off move is very likely, although fluctuations in risk sentiment can be expected in the coming days as markets adjust to the new reality. This probable risk-off move reflects the miscalculation over the past few days that Clinton was the likely victor.

How the markets respond after this will in no small part depend on Trump’s behaviour. Will he continue to favour sound bites and rhetoric over policy and substance? Or will he, having won the election, turn his promised business acumen into real tangible – and achievable – objectives whilst navigating the complex political machinery of Washington?

For the next two months, Trump’s focus will be on securing a team to both lead the functions of government and advise him. In many respects, Trump’s Cabinet and advisers may prove more important in policy and decision making than the President himself.

Markets will therefore closely watch his choices (including the responses from those he approaches to serve under him), and constantly re-price risk based on these decisions. For investors, this is a difficult and unpredictable time, and one in which sitting on the sidelines may be better than trying to trade around unfolding events.

Beyond Trump’s inauguration, focus will turn to fiscal policy, and other areas of reform promised during Trump’s campaign. Principally, markets will be looking for signs that the President can or will implement the policies he proposes.

Again, decisions here – and the Congressional response – are likely to cause a series of short cycles, where markets will overreact to periods of heavy news flow and increased uncertainty in the months ahead. Being nimble – ready to deploy capital on weakness, and rapidly taking profits where they are made – is likely to be the winning strategy in the medium term.