After what has been dubbed the most controversial presidential election campaign to date, outspoken Republican candidate Donald Trump is set to become the US’ 45th president after winning the race to the White House.
In the run-up to the election, many investment professionals warned a Trump victory could have a detrimental impact on many areas of the market due to currency fluctuations, uncertainty surrounding his policies and a potential trade war between the US and China, to name but a few.
In FE Trustnet’s poll last month, it was found that some 40 per cent of readers had significantly repositioned their portfolios ahead of the US election, while 7 per cent had made minor changes. However, it is of course difficult to accurately alter portfolio positions ahead of an uncertain outcome.
Investors may have been taken by surprise by the fact that the FTSE 100 ended yesterday’s session up 1 per cent while, at the time of writing, the S&P 500 was on a 0.68 per cent gain.
However, this by no means suggests investors are out of the woods over the medium-to-long term. With the Republican candidate now set to take office, how can investors both protect and grow their returns from potential headwinds?
One area of the market that has caused the biggest speculation is gold, which has already rallied significantly year-to-date. Since the start of the year, the GSCI Gold Spot index is up 3.01 per cent but has remained fairly flat over the last month.
Performance of index in 2016
Source: FE Analytics
Prior to the election, some economists predicted that gold would rally further following a Trump victory due to a potential fall in the dollar and a move into more defensive assets. Whether this is sustainable over the medium term is a different matter, however.
James Butterfill, head of research and investment strategy at ETF Securities, points out that Trump has been critical of loose monetary policy and is likely to seek a new governor with a more hawkish outlook when current Federal Reserve chairperson Janet Yellen’s tenure is complete.
“Investors are likely react negatively to this monetary policy uncertainty,” he said.
“Furthermore, US equities are trading at a 50 per cent premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off. Consequently, some equities are likely to hit their limit down (5 per cent fall) and therefore have trading suspended.
“A Trump win is likely to drive gold prices higher as investors seek a haven asset in a similar manner to what we saw during Brexit. Gold miners will likely benefit as they have a 2.4x beta to the gold price.”
For those opting for the ‘safe haven’ route, Chelsea Financial Service’s Darius McDermott recommends the BlackRock Gold and General fund, which offers exposure via a global portfolio of gold mining equities.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
For investors with an even more cautious disposition, he says Church House Tenax Absolute Return Strategies and Premier Defensive Growth both have track records of protecting investors’ capital during falling markets.
Adrian Lowcock, investment director at Architas, agrees gold is likely to rise on the back of the election result. He also thinks it remains an important asset class for investors long after the initial excitement over the election has faded, as Trump remains a largely unknown and unpredictable element.
He said: “Investors should ensure they are well diversified, have protection, such as gold, in their portfolios and treat any weakness in markets as an opportunity. Strange as it may feel now, the world will quickly adjust to having president Trump.”
Not everybody believes that gold is the best asset class to buy into at the moment, though. Tom Carroll, director at Sanlam FOUR, says this morning’s rise in gold was a knee-jerk reaction due to an unwillingness to buy risk assets.
However, he points out that Trump’s first speech yesterday was conciliatory to some extent and mentioned significant spending on infrastructure. He therefore believes that, when greater clarity is gained in terms of his proposals, some market risk and therefore the gold price could begin to unwind.
“I think people will get to see that the policies maybe aren’t as extreme as he was talking about in his pre-election manifesto,” he reasoned.
“I think we’re clearly in an environment where his policies look to be very much pro-growth, there’ll be a lot of increased spending on infrastructure, he talks a lot about tax cuts and, in that environment, you’d have to think that equities would be the favourite asset class, particularly with inflation expectations rising over time.”
When it comes to equities, markets across varying regions are of course going to be impacted differently.
Vikor Nossek, director of research at ETF provider WisdomTree, says Trump is likely to look inwards towards the US economy, which would therefore result in strong domestic growth. As such, he says investors may consider a US small-cap equity strategy and a US quality dividend strategy.
Lars Kreckel, global equity strategist in Legal & General Investment Management’s asset allocation team, expects a higher risk premium for US assets.
“For equities, some of this effect should be offset by the prospect of higher earnings growth, driven by a significant fiscal stimulus package, although we still expect a net negative effect,” he said.
For those whose glasses are half full, McDermott says Brown Advisory US Flexible Equity is a good option, given the lead manager R. Hutchings Vernon has more than 30 years’ experience in steering investors through market ups and downs.
Another fund to look at, according to McDermott, is AXA Framlington American Growth, which focuses on companies with a unique competitive advantage regardless of macro conditions.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“For something a bit different, Hermes US SMID Equity invests in a concentrated number of smaller and medium-sized companies,” he added. “This may make it more volatile than larger cap US funds, but as we saw in the UK post-Brexit vote, smaller companies can sometimes surprise.”
Ryan Hughes, head of fund selection at AJ Bell, says those looking for specific defensive exposure will find it harder to achieve via funds.
As an alternative, however, he suggests investors look at the Artemis US Absolute Return fund.
“This takes a long/short approach and is therefore able to make money from both long and short positions,” he explained.
“Given the nature of Trump’s policies, it may create quite a large opportunity set for this type of strategy to profit from. At the very least, if you are nervous of US markets now, this could be a good way of keeping some exposure but without being fully exposed.”
Over the shorter term, Lombard Odier’s Jan Straatman and Salman Ahmed expect downward pressure on risky assets to continue, at least until clarity emerges on the new president’s policy agenda.
“The outlook for US equities can improve if immigration issues are not made a key policy focus under the Trump presidency,” they explained.
“It is worth noting the equity market outlook is under the influence of opposing forces emanating from potential fiscal easing under a Mr Trump presidency versus strengthening of the anti-globalisation narrative of his campaign rhetoric.
“In the short term, depending on the reaction of the equity market (if the damage is strong), the Federal Reserve could take the upcoming December interest rate hike off the table. Beyond that, we anticipate a hawkish Fed trajectory to accommodate fiscal easing.”
Unigestion’s Florian Ielpo and Jeremy Gatto say that what is known of Trump’s programme so far is remarkably favourable for the US market, although his foreign policy ambitions and opposition to free trade are less positive for the emerging world.
“Mr Trump made it very clear during his campaign that he did not view the influence of China as benign for the global economy, and his negative views on Mexico and even Canada to some extent have been well reported,” they said.
“In the longer term, fiscal stimulus should support US equities, particularly energy and domestically-oriented companies, but work against bonds. This, combined with the prospect of repatriation of US dollar assets should be supportive of the currency, while emerging economies are likely to bear the brunt of the expected shift in US foreign policy.”
Michael Levy, frontier and emerging markets investment director at Barings, sees a number of possible issues and opportunities for emerging and frontier markets.
Across the Mexican border, for instance, he says there is likely to be a great deal of apprehension as to what the coming months may bring.
He says global trade will likely suffer and capital flows between countries may weaken if there is a move towards tariffs. Given Mexico’s reliance on the US, he warns the country could be disproportionally affected.
“Almost a third of Mexico’s GDP relies on its northern neighbour and Trump’s promise of a 35 per cent tariff targeted at US companies that outsource abroad could be costly, particularly for the automotive industry,” he explained.
“Trump has also mentioned plans to renegotiate the North American Free Trade Agreement [NAFTA], another potentially worrying development.”
Another emerging market Levy says could be significantly impacted is China, given Trump’s belief that the country is undercutting the American worker.
This, he says, has led to a talk of 45 per cent tariffs against Chinese exports, a move that he warns could start a trade war.
“The global supply chain, which is highly interconnected in the IT and automotive industries, would also suffer greatly and is already facing disruption after the Brexit vote in the UK,” he continued.
“At this point we should note that trade policy can be changed by executive order—an intransigent Congress may not be able to intervene.
“If we do find ourselves in a trade war, Chinese authorities would likely act to stimulate demand, but the Chinese equity market, which has performed well in recent months, could become increasingly volatile.”
On the other hand, he says the greatest beneficiary of a Trump presidency could well be Russia, given that its relations with the US are likely to improve.
Performance of indices over 5yrs
Source: FE Analytics
“We will possibly see a reduction in sanctions in the coming months, allowing Russian businesses to more easily finance themselves. This should provide a boost to Russian companies’ prospects and may present new opportunities among Russian equities,” he added.
When it comes to fixed income in the sector, M&G Emerging Market Bond manager Claudia Calich says the election result is clearly a negative at first glance, given the potential downside risks from increased trade protectionism, anti-immigration measures, large fiscal expansion and steepening of the US yield curve and uncertainty in terms of foreign policy.
“These risks are already being reflected in asset prices. Since the result, Mexico is one of the largest underperformers due to its deep trade and economic ties to the US,” she said.
“Another region which could suffer is Central America. If Trump goes ahead with all of his proposals during the campaign and manages to overcome the logistical nightmare of having all illegal immigrants deported, remittances from these immigrants will come to an end and that will certainly have an impact on their home countries’ economies.
“In Central America, countries seeing the largest impact would be the smaller ones, such as Guatemala, El Salvador and Honduras, where unauthorised remittances from the US could account for as much as 5.6 per cent, 8 per cent and 13.2 per cent of their respective GDPs, according to our estimations.
“These countries have a much higher share of remittances vs. GDP and current account receipts because their share of illegal immigrants is higher in comparison to the size of their economies and population.”
When it comes to fixed income generally, a flight to safety and the potential delay on a rate rise could prove to be good news at first.
However, Legal & General Investment Management’s Kreckel warns that many of Trump’s policies could ultimately be inflationary given his bid to boost fiscal spending.
“Protectionist policies could drive up import prices, anti-immigration policies could boost domestic wages and significant fiscal stimulus could add further to inflationary pressures. However, all of these are second-round effects that could take time to materialise,” he explained.
“This divergence between short-term and medium-term risk is also reflected in Fed expectations. The increase in current uncertainty has reduced market pricing of a Fed rate hike in December, but the longer-term inflationary pressures could lead to a faster path of rate hikes once markets and circumstances settle down.”
Jonathan Platt, head of fixed income at Royal London Asset Management, points out that US government bonds have already risen back. That said, he also warns that steeper yield curves and the implied level of future inflation have both risen, indicating longer term uncertainty.
He said: “In Europe and the UK, government bond markets have actually changed little, while corporate bonds are a little weaker, but not significantly, although again yields on longer dated debt have risen.
“The main implications of this election are likely to be higher inflation as a result of fiscal policies such as tax cuts and infrastructure spending. In the medium term this will raise US and global interest rates, but there may be a short-term hit to consumer and business confidence. However, a comparison with Brexit would suggest that this could be overstated.
“The Republican’s potential dominance of executive, legislative and judicial branches of US government suggests that there could be meaningful changes to social, economic and foreign policies, although given the animosity felt towards Trump from within his own party, this is no certainty. Trade policy remains the biggest unknown, but Trump’s initial acceptance speech was conciliatory on relations with other countries.
“As bond investors, we are maintaining our short duration positions, our overweight allocations to, and positions within, credit markets and a preference for inflation protected securities as we continue to see expectations of inflation rising.”
David Kelly, chief market strategist for Europe and chief global strategist at JP Morgan Asset Management, says the outlook is potentially positive for stocks and negative for bonds, given that real economic growth in the US has picked up recently and the unemployment rate is low at 4.9 per cent.
While the Trump victory indeed causes political uncertainty, he says the new president has inherited an economy which is “in pretty good shape”.
“Voters have chosen change over caution and politicians tend to respond to what voters want rather than what they need,” he said.
“While the Trump agenda is unlikely to be implemented in full, members of Congress may be willing to go along with some of Mr Trump’s proposals to increase spending, lower taxes, reduce illegal immigration and increase tariffs.
“If they do so, they may well further stoke inflation in an economy which is already heating up. Longer term, increasing government debt to fund these initiatives has obvious dangers.”
While he says the knee-jerk reaction of investors has been to sell US and global stocks and buy Treasury bonds, he warns that a warming economy stoked by expansionary fiscal policy could favour the former over the latter.
“In the long-run, investors would do well to make sure that they are well diversified outside of US stocks and bonds and that they have sufficient exposure to alternatives and international securities,” the chief market strategist concluded.
“In light of the Brexit vote and the US elections, 2016 has proven decisively that populism is a good political strategy – whether it proves to be good for long-term economic fortunes is another question entirely.”