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Trump wins: top bond and equity managers react

Trump wins: top bond and equity managers react

After months of campaigning, the Republican candidate Donald Trump had been declared the surprise winner of the US Presidential Election.

But what does Trump's win mean for investors? Citywire Selector asked leading managers what effects Trump’s presidency would have on the markets.

Not a Brexit re-run

John Beck, Citywire + rated manager at Franklin Templeton, said, beyond knee-jerk reactions and an obvious impact for the Mexican peso, the immediate reaction is not a seismic as first thought.

There have been discussions that this would be Brexit squared or Brexit cubed but that is not the case. Other than the reaction of the Mexican peso, where we unfortunately hold some positions, we have not seen that sort of significant impact. If you read the reports around 4am then you saw the impact for Japan, for example, but that is more a cause for concern for the Bank of Japan.

One thing I would say is it firmly puts the case for the ECB tapering back in the box. They were in the process of formulating their forecasts for their December meeting and there were discussions of what the ECB is going to come up with. However, with the market uncertainty they will have to sit and wait, I believe, as there will be questions over confidence in growth in the immediate future.

Volatility will return

Geir Lode, who is head of global equities at Hermes Investment Management, said to expect market uncertainty especially around Trump’s environmental policies.

Markets dislike uncertainty, and confirmation of Donald Trump’s victory has heightened the potential for wildcard US policies on many fronts. We expect volatility to return as investors gauge how many of the President’s campaign promises can actually be fulfilled: it is likely that many will not be supported by Congress without moderation, but markets are likely to be anxious until this is confirmed.

Tanks, toll roads and tariffs: We expect Trump to take bold, decisive actions in an attempt to fix the US economy, even if Congress manages to lessen the severity of his policies. Defence and infrastructure spending will significantly increase, given his campaign promises. Tax rates will fall, and tariffs will be put in place to support US companies.

Penalties of protectionism: Any benefits from these policies are likely to be short-lived, and in the long term we expect global trade to become constrained as the US becomes more protectionist. President Trump may win popular support by limiting immigration but the damage this causes the US economy will be monumental, with an estimated 11m fall in the US labour force and potential $1.6tn contraction in GDP.

Trump’s denial of human-made climate change is also concerning. COP21 in Paris last year marked a change in the fight against global warming as governments across the world boldly pledged to slow carbon emissions in their respective economies. A reversal of the US’s commitment to reduce emissions could lead to other governments reneging on their promises.

Consult the Brexit playbook

Joe Amato, who is CIO of equities, and Erik Knutzen, who is CIO of multi-asset, at Neuberger Berman said, while safe haven currencies will benefit, there could be buying opportunities.

After one of the most bitter and divisive US presidential election campaigns in living memory, the outcome is arguably the one that markets were dreading.

Whereas Clinton was the ‘business-as-usual’ candidate, Trump is much less predictable. Regardless of what the longer-term impact of his policies will be on the economy, risk-assets are likely to respond with high levels of volatility in the shorter-term as we try to figure out what those policies are and how many of them are realistic. A December rate hike from the Federal Reserve, priced as almost a certainty the day before yesterday, may now be off the cards.

Where Clinton, under pressure from unions and Bernie Sanders supporters, vacillated in her support for free trade in general and the Trans-Pacific Partnership (TPP) in particular, Trump has positioned himself as an all-out trade warrior. That could dampen the spirit in emerging markets – just look at the Mexican peso – which have been recovering strongly for most of this year.

Safe havens such as the Japanese yen and Swiss franc are likely to benefit during the immediate fallout – although the picture is much less clear for the US dollar and US treasuries, of course. A concerted ‘sell-America’ trade is a distinct possibility.

Nonetheless, we believe the Brexit playbook is useful here. Market volatility may endure for a little longer, but as it does so, it could deliver buying opportunities.

Sell risk

Fabrizio Quirighetti, who manages several funds at SYZ Asset Management including the OYSTER Absolute Return fund, said EM equities will be the hardest hit.

This unprecedented presidential race has finally come to an end and, once again, the anti-establishment vote has been underestimated by polls, journalists and analysts as the winner is Donald Trump. The first thing that comes to our mind is ‘hope for the best, but prepare for the worst’, as the campaign has provided many evidences Trump could be a terrible president.

His victory, to an extent, is also the symbol of current political failure to address key socio-economic challenges. It clearly has raised uncertainties – at least in the short term – not only about the current economic backdrop, but also in terms of geopolitical developments going forward. As a result, elevated volatility across global markets may prevail for the next few days and probably bring interesting opportunities if assets valuations reach exaggerated depressed levels at some point.

The immediate reaction now is to sell risk, especially emerging market assets, and buy safe-haven assets such as US treasuries and gold. Medium-term, his administration could be characterised by a powerful reflation trade, with a higher bond yields.

Populism coming to power

Eric Lonergan, who manages the M&G Episode Macro fund with Citwyire AA-rated David Fishwick, said there were strong similarities with the UK’s decision to leave the EU.

It's Brexit all over again. The surge in anti-establishment sentiment is definitively global. Brexit can no longer be dismissed as a freak event. It is a trend. Donald Trump looks almost certain to win, by defying his party, the media, and conventional politics. Populism is coming to power. The critical issue now is what this mean in practice.

The immediate market reaction is predictable. Risk assets have fallen sharply, safe assets are rallying, and the dollar is falling. It's deja vu all over again. Like Brexit, will we see a reversal in asset prices in the next weeks or months?

Although at this stage it looks likely that the Republicans will retain the House and the Senate, a President Trump will be far more constrained in practice than he has sounded campaigning. Even though both houses are likely to controlled by Republicans, this is no guarantee of agreement on his more outlandish policies (building walls and initiating trade wars). He will be pushing on an open door repealing Obamacare and cutting taxes, which are arguably market-friendly, although both are likely harder in practice.

The critical unknown is whether a Trump presidency pursues the policies of Trump the candidate, in particular his anti-trade, anti-China and anti-Mexico policies. Reason suggests that Congress and financial markets will regulate his ability to act. It is equally possible that these campaign rally cries are abandoned with the responsibility of power. But the real concern is that he will do what he says.

US equities are not cheap

Citywire A-rated Ian Heslop, who is head of global equities at Old Mutual Global Investors and manager on several funds said the future is uncertain, but US equities were not a bargain. 

Overturning predictions, Trump won key swing states of Florida, Ohio and North Carolina on his path to the White House. Forecasters have been wrong-footed, and there could be increased volatility in markets while investors digest this new information, and wrestle to understand the implications of the Trump presidency.

The dollar has come under pressure, both because a hike in interest rates by the US Federal Reserve now seems less likely, and also because investors may place a higher risk premium on US investments. Volatility across many asset classes could increase in the short-term.

Looking further ahead, several of Trump’s policies, for example his protectionism, his desire to scrap existing international trade deals, and to deport illegal immigrants, have the potential to contribute to longer-term market volatility.

Bbut others, for example his plans to slash taxes, including reducing the business rate from 35% to 15%, his plans to encourage repatriation of corporate profits held offshore, and to embark on massive infrastructure spending, could stimulate the US economy, lifting equities. Much is uncertain, not least because his campaign promises have been long on rhetoric and short on policy detail.

In my view, active managers have a great opportunity at the moment because there is a lot of mispricing in North America. Although North America as a whole is not cheap, there are cheap areas of North America that can be exploited by investors who are nimble enough.

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Fabrizio Quirighetti
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