“So again we sit, eating our breakfast, watching the news in total disbelief. It’s actually happened (many suspected it would). 2016 certainly seems to be throwing us a curveball, with things that would seem the stuff of dreams (or nightmares) two years ago, becoming a very stark reality.
Is it turning into the 1st world’s Arab Spring – The West’s Winter? They said that the Brexit Vote could have a ripple effect, but it looks more like a very large wave that made it across the Atlantic. So what could the implications be for us following the election result, in terms of markets? Brexit was a European issue, whereas the American presidency has far bigger global ramifications.
Once again, we will see short term panic on global markets, but even as I write this the Asian markets are starting to recover - it will probably be a short-term dip – it is the long-term future that we need to consider. For the Fund managers, their main concern and priority now is navigating our portfolios through choppy waters once again. The last ten years have been a rollercoaster, and this again feels like sitting on the top of the first big climb on the ‘Big One’ waiting to see how big the fall feels. It will go up again, and it will even let us get off at some point to take a breather before we get back on again to experience the ride once again.
Over the next few days, we will be monitoring markets closely, talking to our portfolio managers and keeping you as up to date as much as we can. There will be lots of noise coming out, so our job will be to try and cut through this and release the commentary that we think is important.”
Liz Beavis, FMB Managing Director
Here is some commentary from some of the fund managers:
Seven Investment Management (7IM)
“So, it happened again. The polls were wrong, the betting was wrong, and the markets were wrong.
In the interest of downside protection, we were positioned more for a surprise Trump victory than for a Clinton win. We felt there was complacency in markets that overlooked the political risks of disenfranchised voters. We currently hold our lowest equity weighting since 2009 and we have a high allocation to cash.
Overnight, we saw a confirmation of most of our expected immediate market moves – global equities sold off, with the S&P down 5%, whilst gold and the Japanese Yen rallied strongly. The Mexican Peso lost over 10% of its value.
As a result:-
- Our underweights to Developed Market equities will have served us well
- Yesterday’s increase in JPY and decrease in Asia and EM Equity have both been positive for performance
- We will have seen gains from gold, US Treasuries and the inflation swaps we hold
- Put spreads purchased cheaply in late July have increased in value, and are offering increased protection against further falls in the S&P 500.
A vulnerable position we have is our EM Bond exposure, where 10% of the index is in Mexican bonds. We accepted this risk because had Trump lost, the rebound potential for the Peso was substantial. Our risk reduction in other areas of the portfolio was partly to address this.”
“For the first time a businessman with little political experience has won the US presidential election and we expect the impact of the result on equity markets to be mixed, with an initial short-term hit as the world adjusts to the perceived increase in geopolitical and economic risk.
Longer-term, the obvious winners will be infrastructure, with a focus on roads, bridges, airports and sectors that would benefit from M&A and industry consolidation, which Trump is particularly
enthusiastic about. Financials will benefit from loosening of the Dodd-Frank regulations, while the defence sector is likely to thrive.
Other sectors likely to do well include consumer discretionary, consumer staples, telecoms, energy and mining.We expect fiscal easing to come through in the shape of tax cuts, targeted in particular at low-spending consumers, and an increase in defence spending. Given a likely increase in budget deficits, we expect a steeper bond yield curve; additionally, Trump has made
some disconcerting comments regarding a lack of commitment to debt repayments.
Trade protectionism is perhaps the biggest economic fear, as we could see stagflationary outcomes and a real risk to emerging markets, in particular Mexico and China. Expectations of inflation in the US have already turned and protectionism will accentuate those fears. Ultimately, monetary policy uncertainty, protectionism and fiscal easing are not a recipe for lower rates.
The US electorate has voted for change, but it's worth remembering that Trump's stated policies have been somewhat thin and we are unsure which of his pre-election announcements will result in firm policy-making.
More will emerge over the coming weeks, but in the meantime markets are likely to remain volatile as they deal with the ongoing uncertainty.
Clearly, a smooth transition of power would be welcome – markets do not like uncertainty.”