As the world now knows, Donald Trump will be the 45th President of the USA. 12 months ago, this result would have seemed utterly outlandish, but over the past couple of weeks, particularly since the FBI’s last intervention in the Clinton email saga, a Trump victory has actually been the more likely outcome.
I suspect the ramifications of the election, the way it was conducted and the various accusations made against both parties will rumble on ahead of Mr Trump finally taking office in January.
In terms of markets, a Trump victory has long been deemed a portent of doom. There is no doubt that a Clinton victory would have produced far less uncertainty for global politics and stock markets. That said, it is easy to forget how Trump came to prominence. He is a man of American big business, an antidote to career politicians, someone who understands how business works and who knows who the influencers are. If we can’t predict his policies or methods, we can at least surmise that in the longer term, US companies will now have someone in charge who fights their corner. Whisper it quietly, but as the dust settles, perhaps Donald Trump may even bring about corporate growth and prosperity.
It is unlikely that growth and prosperity will be at the levels he predicted in his election campaign and to date there has been little indication of how he is going to raise the money to boost the US economy further. Let us not forget that the US economy is one of the strongest, if not the strongest in the world and it has been best recoveree from the Financial Crisis of 2008. So to a great extent, the system isn’t broken, but the popular view of inequality remains and Donald Trump may seek to becalm that by protectionist measures. One could take a view that he isn’t that concerned what the rest of the world think of his plans, but if he can focus on US domestic growth and take a more introverted view of what he deems success to be then that is most likely what he will do.
How does all this play out in stock markets? Potentially, US domestic companies who don’t focus on imports, but focus on the US consumer, US prosperity and the exporting of US goods abroad are likely to do well. Companies that fall into that category could be in the manufacturing and infrastructure sectors. There is a debate to be settled in the US over the minimum wage before manufacturing in the US becomes more competitive than importing from abroad and for every policy idea Mr Trump has to boost productivity, he will have to resolve these political issues. If infrastructure becomes a focus for future policy, then that may indicate that sectors such as energy and mining could benefit from a Trump regime. As a businessman, one could foresee him loosening regulation to make “doing business” easier in the future. Assuming that he can find the money to fund his projects without crippling the US economy then a more introverted, selfish US is likely to come about, which may not suit the rest of the world, but from an investor perspective, a strong US economy which is growing offers real growth opportunities.
Mr Trump could be derailed by an inability to push his policies through the layers of the US political system. The Obama Presidency has shown how difficult it can be to make policy changes in the US and how diluted the proposals become by compromise. For any other candidate whose party controls both the Senate and the White House, you would think that most barriers to change should be easily overcome, but Mr Trump isn’t popular in his own Republican party, so it will be interesting to see how much of his rhetoric comes into being.
There are concerns over the Federal Reserve and how long Janet Yellen will remain in charge. The Federal Reserve are a separate, independent entity to the White House, but it would be hard to foresee a Trump presidency where he isn’t piling the pressure on for his preferred mode of monetary policy. Yellen is a highly respected, dovish individual and her tenure is due to last until 2018. If she stays, then confidence will ensue in US monetary policy, inflation and interest rate targets until that time, if she goes early, then that will create further uncertainty, which markets won’t take well to. Many commentators in the immediate aftermath of the election result were predicting a US recession with Trump proceeding to “break the bank”. We are not so sure that a recession is inevitable. The current economic cycle has looked to be moving towards its later stages over the past year, but later stages don’t have to mean manic recession or economic crash. Commentators were also saying that the markets hadn’t priced in a potential Trump victory at all and so the fallout from the election could be even worse than expected. Market reaction thus far doesn’t bear out that prophecy and based on the turning tide towards a Trump victory in recent days, many fund managers we were speaking to were neutralising portfolios as best they could in part to limit falls, but more to take advantage of opportunity arising from an oversold market.
The global threat resulting from the Trump election seems to lie in emerging markets; Asia and Latin America in particular. You could foresee Mr Trump and President Putin having frank but amiable talks about future trading and perhaps a new broom in the White House opens the door to the UK for easier post Brexit talks. After all, Donald Trump was a Brexiteer. On the subject of Brexit, it is quite ironic that wider US reaction to the UK voting for Brexit at the time was equally as incredulous as our view of the US voting for Trump, but we are both in this historically unexpected situation. One doubts that Mr Trump will have much time for historical precedence when it comes to trade deals and whilst the USA’s own interests will come ahead of all else, a strong partnership with the UK would seem to be in his interests and so at the moment we aren’t intending to make changes to our UK equity exposure until something further prompts us to do so.
One would hope that there is more to Latin America than a Mexican wall and as a region it has performed well in our portfolios, but there is no denying that it is a potential weak point post Trump and so we have sold our allocation to the Threadneedle Latin American fund. Latin American companies export a vast amount to the US and a Trump Presidency is likely to signal the end to such trade agreements. All is not lost in Latin America, but with the news so fresh, it seemed an obvious place to move out of.
We have also sold our allocation to the Blackrock Asian Special Situations, Liontrust Asian Income, Henderson Asian Income and Standard Life Global Emerging Market Equity Income funds. We aren’t concerned about how those specific funds are managed, but we are concerned that Asia as a whole may be a loser from a Trump regime. Asia is a key exporter to the US and with the US likely to become more self-sufficient, a key trade partner for Asia is lost. Relations between China and the US are unlikely to be smooth ongoing, with trade the main issue and so there appear to be headwinds for the region. We anticipate buying back into Asia in the future as the Blackrock fund in particular, has been an exceptional performer in our portfolios. For now though, we anticipate greater losses in Asia than the rest of the world and so we have made a tactical move to reduce allocation to the region and look for an attractive point at which to buy back in when values have fallen, assuming they do.
We have diverted this allocation to commodities. Some analysts predict a 20% rise in the gold price on the back of a Trump victory, we aren’t setting our stall on that outcome, but we do think that as we saw post Brexit, in times of market uncertainty, physical assets such as gold and oil are still regarded as something of a safe haven and may outperform broader equity markets. Allied to the safe haven mantle, the aforementioned infrastructure investment options may be positive for commodities and so we have increased our commodity allocation to overweight in the near term, whilst the markets work out who the winners and losers really are.
A final change we have made is to switch from the Baillie Gifford Global Discovery fund into the First State Listed Infrastructure fund. Longer term, inflation is a rising concern across our portfolios and the First State fund is designed to perform well in an inflationary environment, but the reason for introducing the fund earlier than anticipated is that we feel it is a more secure option than the Baillie Gifford fund at this time. The Baillie Gifford fund concentrates on global smaller companies. They may do well in a Trump growth rally scenario, but they are far more volatile than many other stocks and they are harder to position in a post-election scenario, because they are generally businesses which work in the consumer and technology space. How fiscal policy and overseas trade will affect these businesses is relatively unknown and so we feel that we have more certainty over the Infrastructure fund.
The changes made to portfolios are not sweeping, we haven’t sold everything down to cash and we are not anti-US. If anything, we consider the longer term implication for a Trump victory to impact Europe ahead of other markets. If Donald Trump, the anti-establishment figure can become the most powerful man in the world, what is to stop the forthcoming European elections producing similar anti-establishment results? Investment markets are fragmented and in every sector and asset class there is uncertainty, but uncertainty doesn’t have to mean inevitable doom.
I would anticipate more tweaks to portfolios in the weeks ahead, as we may not wish to keep such an overweight position to commodities when things settle down and if Donald Trump repeals Obamacare then perhaps our healthcare allocation needs altering. Immediately post result, healthcare has been one of the best performers in the FTSE. This may be healthcare’s way of rejoicing that Hillary Clinton didn’t win the election, but also demonstrates healthcare’s defensive qualities. The outlook for healthcare under Trump may not be particularly encouraging and so we are continually reassessing our portfolio positions to try to protect against the falls, but take advantage of opportunities when they arise.
We cannot take market volatility lightly and possible negative reactions in the markets to the election result, which will knock on globally, but we would also anticipate a bounce back from that position once the news is reconciled. Donald Trump can sow seeds of doubt immediately, but he cannot change policy or unwind the strength of US business overnight. Markets will become splintered as certain sectors do well and others look poised to struggle under his administration. In many respects, this volatility and diversification is how markets should behave. Not everything should do well at the same time all the time. Funds in our portfolios such as our Recovery holdings may sometimes be the hardest funds to own due to their lack of predictability, but they are designed for markets such as these and at this stage we must not panic and should stick to a calm thesis which adapts with the changing circumstances.
Donald Trump may not resonate with everyone in his social views or behaviour, but from an investment perspective, we have to concentrate on economic policy and not his likeability. The headlines over the coming days won’t support that pragmatic approach and will create a chaotic sense of panic, but we must separate out the two Donald Trumps and focus on the one which history will come to judge as either representing a bringer of doom who unravels global investment markets, or just maybe, as a catalyst for a new wave of business prosperity.