The investment industry is adjusting to a “new normal” following the shock election of Donald Trump as US president.
Fund groups are still digesting what the outcome of the US election means for global market dynamics and whether we are headed for a revolutionary style of politics from the world’s largest economy.
Despite initial concerns, the Trump win has yet to materialise into the sustained equity sell-off many had feared.
But most commentators believe the fallout from the US vote is yet to come and may be compounded by the other big political threat– Brexit.
Investment firms and wealth managers are beginning to chart a plan of action for clients’ portfolios based on what Trump’s upcoming policy agenda could look like.
Brexit and Trump
Trump’s victory has been dubbed “Brexit all over again”, given the political and market uncertainty sparked by both developments.
JP Morgan Asset Management chief market strategist for UK and Europe Stephanie Flanders says in the long term Brexit is “a bigger deal” for the UK than Trump’s election victory will be.
She says:“Brexit marked a generational change in the UK’s relationship with the world which cannot easily be reversed by future governments and future elections.
“That is not the case with Trump, who could be out of office in four years’ time and won extremely narrowly in several key states. But for the world economy and markets, clearly Trump’s election will be much more important over any reas-onable timeframe.”
But Wealth Management Association deputy chief executive John Barrass says the global impact of the Trump presidency is “much greater” than Brexit.
“Brexit marked a generational change in the UK’s relationship with the world which cannot be reversed. That is not the case with Trump”
He says: “What we are doing in Britain is making changes to the way we relate to a club of nations. It’s the world’s biggest club, the one which is the most integrated in terms of countries working together. We are getting out of that club but as a nation, and certainly at the moment, we are not changing.
“Brexit will certainly have an impact, for example, on the movement of people, business and investments but it is not making a major constitutional change to the way in which a country on which everybody else depends is going to conduct its affairs.”
Tilney Bestinvest managing director Jason Hollands says both the Trump win and Brexit will bring “considerable near-term uncertainties”, given the lack of concrete details on US policies and the terms of the UK’s exit from the EU.
He says: “Both events carry a plethora of risks and opportunities which typically go hand-in-hand in the investment world.
“What we can expect to see is a shift in emphasis from monetary policy as the focal point of economic management towards fiscal policy under the stewardship of elected politicians. That means greater investment in infrastructure and changes to taxation.”
‘Benefit of the doubt’
In the wake of the election, US stocks opened positively on 9 November and the FTSE 100 recovered after falling 2 per cent.
But investors are braced for increasing volatility.
Flanders argues Trump’s win accelerates and intensifies two major trends we “already saw coming down the track”, which are higher inflation expectations and the related trend of rising yields on long-dated sovereign bonds.
She says: “The big change since the US election is the fresh turn in favour of the dollar and against, in particular, emerging market assets. This goes against the trend since the start of the year and will catch many active investors on the hop.”
Investec Asset Management head of multi-asset income John Stopford says so far investors have been willing to give Trump “the benefit of the doubt”, focusing on his reflationary policies, and
assuming he will be less aggressive in his policies than on the campaign trail. He says: “For now, it is beginning to look as though bond yields and the dollar can go higher.”
As Trump’s victory could lead to rising inflation, bond markets globally have already seen some $1trn wiped off their market value, according to Bank of America Merrill Lynch.
US 10-year government bond yields have risen as high as 2.2 per cent at the start of this week, from 1.8 per cent at the start of the month. Similarly, UK 10-year gilt yields have spiked to 1.49 per cent, the highest since the end of May and almost 1 percentage point higher than August.
Conversely, the FTSE 100 was up 1 per cent on the expectation that higher inflation and interest rates could benefit sectors such as banks.
Old Mutual Global Investors head of global equities and manager of the £1.6bn North American Equity fund Ian Heslop says: “Often ‘shock’ events have the opposite effect to that expected by the market: for example, the risk-on rally post Brexit was unlikely, but happened. We remain convinced the best way to manage uncertain markets is by understanding the impact of macro-economic, geopolitical and com-pany fundamental information on the market itself.
“For this reason we continue to be positioned to take advantage of the move to ‘riskier’ assets we witnessed post-Brexit, with some hedging positions in place in the event of a sharp change in sentiment.”
But Legal & General multi-index range lead fund manager Justin Onuekwusi is demonstrating the opposite view by shunning risky assets.
He has already taken down equity levels in funds selling US and emerging markets equities.
Onuekwusi says: “The US will become more domestic-oriented so emerging markets won’t have the benefits from exports. If Trump reiterates his extreme policies, markets will become more volatile, but until January [when he is inaugurated] he won’t give any major speeches.”
Onuekwusi says all eyes are firmly on the Federal Reserve and what it will do with interest rates come December. He says: “There’s no reason not to raise rates, but we are not naïve – markets will continue to be volatile.”
In the event of Trump stimulus policies to fuel growth, these could weaken the dollar and push interest rates higher. There is also an expectation the Republicans will push for “friendlier” regulation for banks and insurers.
Panmure Gordon head of research Barrie Cornes argues Trump will be good for financials overall. He says: “It is an inflationary trade so an increase in interest rates will be particularly good for insurers where we’ve already seen share prices going up after the vote.”
But Cantor Fitzgerald Europe equity research financials director Keith Baird argues higher inflation could be offsetting for equities and bonds and “unhelpful” for int-ernational asset managers if that hits market index levels. He says: “If we get more trade protectionism, it is also potentially negative for emerging markets, and asset managers such as Aberdeen and Ashmore.”
Hollands says Trump’s climate change scepticism will be beneficial for US oil and gas companies.
With Trump favouring an “America first” agenda through redistributing wealth at home, domestic firms are set to be among the winners from his presidency.
The T Rowe Price US Smaller Companies fund is one of fund selectors’ favourite calls as one that could benefit from Trump’s administration.
Similarly, the Axa Framlington Health fund, which is 71 per cent invested in North America, might continue to benefit from Trump’s less interventionist approach on drug pricing, Hollands says.
Emerging markets pain
Star fund manager Neil Woodford has already said Trump’s election could end the market’s “love affair” with emerging market equities and bonds because of a strengthening dollar and the risk of protectionist tariffs.
Emerging markets specialist Charlemagne Capital co-chief investment officer Julian Mayo’s main concerns are around what the US vote could mean for China. But he believes the outlook for emerging markets is more positive than the initial fallout would have us believe.
“If Trump reiterates his extreme policies, markets will become more volatile, but until January [when he is inaugurated] he won’t give any major speeches”
He says: “If we compare the 2013 US taper tantrum and now, it is a different scenario. The US interest rates cycle was different in 2013 and was very well flagged for some time. The external balance of these companies in emerging markets is much better than 2013. Turkey, South Africa, Indonesia and Brazil’s current account deficit is half of the 5 or 6 per cent of their GDP than it was at that time, so in the long term currencies shouldn’t weaken.
“For the short term, a lot has been driven by US policies but it is a question of how much more protectionist they will become.”
Jan Dehn, head of research at Ashmore says Trump’s election will create opportunities in EM that “should not be wasted”.
He says: “EM technicals are much better with most institutional investors underweight and only ETF flows likely to exit. Second, EM growth premium is rising, not falling.
“Finally, the dollar is 20 per cent overvalued and EM real effective exchange rates are back to 2003 levels. Hence, the EM selloff will be very limited and I expect very few, if any, fundamental fallout.”
Mayo says both Brexit and the US election have demonstrated that policy risk in developed markets is much higher than just a few years ago and that in the long run this would offset their attractiveness.
He says: “Markets are focusing on the negative of EM but people will realise this is a reflection of higher policy risk in the US. In the long term this event could be a catalyst from moving more attention away from attractiveness of developed markets.”
Experts argue the Brexit and Trump votes are a clear sign of how voters are shifting focus onto less well-established groups in exchange for a promise of fiscal reforms to stimulate their economy.
Old Mutual Global Investors head of UK equities Richard Buxton says despite the “scary” outlook which could see Trump negatively affecting the globalisation of trade, his victory could potentially halt central banks’ increasing power of the past few years.
He says: “This is the high watermark of central bankers. From here, they will gently decline from being financial gods – arguably more powerful even than elected politicians, markets trembling on their every word – to officials, public servants of the common good.
“Central banks, starting with the Federal Reserve, will learn that they are not the ultimate source of power in government.”
Barrass says there is likely to be “a period of relative silence” from Trump as he starts preparing for his time in office.
He says: “All the comments so far are based on what we know now, which is what he said in the run-up to the election.
“He has since made very considerable remarks to stop fighting with Hillary Clinton, totally altering his language.
“But he did say all these things and what we need to find out now is the language of a new president. But he carries uncertainties with him, so we can expect some radical policies, which will involve breaking up ways of doing things that we’ve got used to.
“The question is, is he going to hold on to the comments that got him elected, or is he going to take a more considerate view?”
What fund groups say on the prospect of President Trump
Aberdeen Asset Management chief executive, Martin Gilbert
The most important thing people can do is to wait until we know what a Trump presidency actually means. He does seem keen on fiscal stimulus which could be good for the US economy and, in the very short term, his election makes a December rate hike less likely. There is an understandable concern about some of the things that he said on the campaign trail. But governing is very different to campaigning and his tone since winning has been noticeably more restrained.
Fidelity International head of pan-European equities, Paras Anand
The election of Trump to the US presidency is another example of the highly unpredictable environment that we are in from a political perspective. However, as I emphasised at the time of Brexit, it is important to remember that politics impacts the long-term prospects for companies only at the margin in the majority of cases. Hence, whilst the headline may imply a seismic event, investors are better served by maintaining a measured perspective.
M&G multi-asset fund manager, Eric Lonergan
The initial market reaction is consistent with the behaviour we have seen in responses to poll trends. Over subsequent weeks and months, these moves may well reverse. On domestic economic policy, the only policies where Trump is likely to secure Congressional support would be on tax-cutting and deregulation – which are likely to be capital-friendly. We might also witness pro-cyclical fiscal policy for the first time since Reagan, which would profoundly undermine bond markets.
Royal London Asset Management chief investment officer, Piers Hillier
Markets have begun to adjust to what they believe to be the destination of a world where ‘Brexit means Brexit’ and now, ‘Trump means Trump’. While the details of the president-elect’s economic plan for the US are still murky, his core philosophy could well have been drawn from a study of post-Brexit Britain.