Premier’s Robbins: Trump’s reflationary policies likely to cause volatility into 2017

Robbins Jake PremierSo the votes are in and Trump is the President-elect. While Trump’s victory may have come as a surprise to investors across the world, and whatever we think about Trump, the show must go on. Although the news initially led to a sell-off in equities and the dollar, together with a rush to safe havens such as treasuries, this almost immediately reversed direction after a relatively conciliatory victory speech.

Sectors such as pharmaceuticals that were perceived to have been under threat in a Clinton government rallied strongly, as did financials, on the hope of less regulation and a rapidly steepening yield curve (indicating that markets believe that Trump could encourage economic growth and inflation through his promise of significant fiscal stimulus).

Infrastructure companies also benefited from the perception that Trump will invest heavily in the economy and we anticipate financials strengthening as the sector could benefit from a laissez-faire regulatory regime endorsed by Mr Trump. Of the two candidates, it is probably preferable for financials to have Trump in power.

Despite the significant rally that we’ve already seen in the financial sector, it is worth remembering how sensitive these businesses are to interest rates. On the way down, low rates depressed earnings by far more than analysts initially expected, and the same is likely to happen on the way back up. The big global banks could benefit from a lighter regulatory touch and regional banks will do well from economic growth boosting loan demand.

However, the most sensitive interest rate sector is life insurance, as their profits are largely derived from returns on investments made with their clients’ money. With substantial earnings upside and very attractive valuations this is a sector that may benefit most from Trump’s victory.

Other positives are likely to be those companies involved in construction as the US’s creaking infrastructure is upgraded. Construction companies and building materials names are likely beneficiaries, as are equipment manufacturers to these industries. Additionally, with an already tight labour market, increased growth could boost wages and be a boon to the embattled retail sector, which is another sector that we believe offers extremely attractive valuations having been largely ignored by investors over recent years.

Spurred on by hopes of greater infrastructure-fuelled demand, metals also rallied strongly, with copper rising by over 10 per cent on the week and 20 per cent since October. There are fears that recent attempts to curb strength in the Chinese property market has resulted in speculators being forced into commodity markets instead, which may help explain some of the recent extreme moves.

It is also likely that the Chinese authorities will attempt to take some of the heat out of the metals market at some point. With the mining sector already among the biggest gainers this year, the sector already reflects much of this commodity price upside and the risk of a correction is probably high. Equally the oil and gas sector is also one of the best performing sectors, even though oil has gained very little this year despite OPECs best attempts. Again a sector to be cautious on given excess supply persists for now.

If a Trump administration erects barriers to trade between itself and some nations then the consequences for certain sectors and markets are probably more serious. Exporters could struggle as the cost of trade rises, which will be a particular blow to emerging markets that seem to have been stabilising of late. Moreover, with the threat to established institutions like NATO, we will likely see political volatility remain heightened, particularly given looming elections and referendums in Europe.

Markets will probably pause for further clarity on the new President’s actual policies, but if they are indeed as reflationary as he has suggested, with high levels of infrastructure spend and tax cuts, then this volatility is likely to continue into next year. Our focus on businesses with a high combination of value, growth, and quality is designed to make our positioning resilient to this kind of market rotation.

With the Italian referendum fast approaching we can expect to see more uncertainty and more volatility across markets as the year draws to a close. From both the US elections and the Brexit vote, if we have learnt anything this year, it is that the polls are not to be believed!

Jake Robbins is manager of the Premier Global Alpha Growth fund