“It’s always good to be underestimated” - Donald J Trump
For the second time in 2016, investors are having to reflect on a surprising vote. After being shocked by the UK’s decision to leave the EU in June, financial markets are now coming to terms with Donald Trump as the next US president. While the opinion polls were indicating a close race in both the Brexit referendum and US election, both “Remain” and Clinton were ahead for most of the campaign and this appears to have deceived analysts, who seem to have underestimated the level of discontent with the political establishment.
Many deemed that a Trump victory would be a bad thing, so traders initially panicked as the result became clear; gold - a safe haven asset - rose by 5% and Asian stock markets, which were open at the time, declined markedly. Subsequently cooler heads have prevailed and markets have stabilised; the gold price is now 3% lower than before election day and the S&P 500 is just 1% below its all-time high. Given Clinton was expected to win, investors are only now giving their full attention to the Trump economic plan. He advocates spending more on infrastructure and defence, cutting taxes, easing regulation and curtailing trade agreements to boost US economic growth; this will probably lead to higher interest rates, to control inflation, so bond prices have been declining.
There has also been movement in the currency markets. The US dollar has been strong, most notably against the Mexican peso, which has declined in response to fears President Trump will seek to renegotiate or abandon the North American Free Trade Agreement (NAFTA), thereby disrupting the local economy. Sterling has also risen modestly since the election, maybe reflecting a hope that having a pro-Brexit president in the White House would benefit the UK.
The caustic tone adopted and prejudices revealed by Donald Trump during the election campaign appear to have alienated many; however, he seems to be addressing the concerns of a large proportion of the electorate by recognising the need for a broader distribution of prosperity. While he isn’t to everyone’s taste, his economic policies meet the demands of bodies such as the IMF and OECD, who have been calling for higher government spending to accelerate the economic recovery. For the time being, markets appear to have decided that President Trump will be different to candidate Trump; he has been magnanimous since he won the election, and there are indications that his cabinet will be balanced and experienced. It is currently too early to tell if his strident statements on trade agreements, immigration and the Mexican wall were his negotiating stance or intended course of action, but it may be that his critics have underestimated his political guile and economic foresight.
Political change rarely leads to a material change in market outlook, sufficient to require adjustments to clients’ portfolios, and we are currently not altering our asset allocation models. We are, however, re-assessing the risk that an election in Europe delivers a result which challenges the status quo and undermines the euro and/or EU. If a country decided to abandon the euro as its currency, it would have an adverse impact on global stock markets; there would probably be a bank run as depositors lost confidence and the stability of the Eurozone would be threatened.
There are two elections before the end of 2016 - an Italian referendum on constitutional reform and a re-run of the Austrian presidential election - and while these are not likely to be catalysts for disruption, they could give an indication of the popular mood. In 2017 and 2018, however, there are important elections in the Netherlands, France, Germany and Italy and one of these could generate a shock. For instance, one of the front runners in the French presidential election, Marine Le Pen, is taking the populist stance of offering a referendum on euro and EU membership. None of the polls currently indicate she will win, so it would be a surprise, but after the Brexit and Trump results it is hard to be confident in opinion polls and it appears to be unwise to underestimate how radical an electorate might choose to be.
As ever, we believe that the best means of protecting portfolios against the twists and turns of events is by diversifying across asset classes and geographic regions, and ensuring that our recommended fund managers continue to invest in high quality, resilient companies. We will remain with this approach while continuing to monitor developments.
To discuss this note, or any other matter (we are preparing to send a note on other asset classes), please contact Nick Fletcher on 020 3696 6801, or any member of the London Wall Partners investment team on 020 3696 6805.
The information, data, analyses, and opinions contained herein are provided solely for informational purposes and may not be copied or redistributed; neither do they constitute investment advice offered by London Wall Partners and therefore are not an offer to buy or sell any security. London Wall Partners expressly disclaims any responsibility for trading decisions, damages or other losses resulting from any use of the information herein. Investments fluctuate in value and may fall as well as rise and investors may not get back the value of their original investment. Past performance of financial markets should not be used as a guide to future performance.