A silver lining as the Clinton-Obama era ends
Is Donald Trump the new Ronald Reagan, ringing in a renewed bull market for stocks and bonds?
perceivedby many as a joke, a maverick, a national disgrace and much more during the 15-month US presidential campaign, Donald Trump promised a surge of government spending, accompanied by lower taxes and dramatic changes to the international trade regime. That combination worried many investors. It rattled both fixed-interest and equity markets. But, as John Authers wrote in the Financial Times, “nobody took him seriously. Now everyone takes him seriously”.
Authers points to many in Wall Street now drawing a comparison with Ronald Reagan, who like Trump was a Republican who arrived in Washington as an outsider, with many doubting whether he was up to the job. He cut taxes, did not cut spending, and allowed the deficit to rise. That was the dawn of a major long-term rally in stocks and bonds.
Can this be repeated? FundFocus spoke to Ian Heslop on the likely inferences of Trump’s prospective presidency. Heslop is head of Old Mutual Global Equities at Old Mutual Global Investors in London.
What does the Trump win mean for global markets?
It is hard to say at the moment given the lack of clarity regarding the details of the presidentelect’s policies. What we can surmise is that these will be strongly expansionary, and indeed inflationary, given the corporate and personal tax cuts mooted, together with the ramping up in infrastructure spending.
What are the implications?
It will naturally have an impact on US economic growth, but also will likely impact the US Federal Reserve’s (Fed) interest rate policy. For the US, the trade-off between the two is likely positive in the short term, but medium to longer term is difficult to predict.
If markets continue to exhibit the reflation trade seen since the result was made known, the upward adjustment to longer bond yields in the US, together with worries over the disruption to global trade, do not bode well for emerging markets. Fears are rising over the likely outcome of the Italian referendum and the Austrian presidency vote later this year together with the elections in France and Germany [in 2017]. If what we are seeing is a global movement that calls into question the legitimacy of the elite and free trade, Europe could be next.
Could it create a backwash in other global economies such as China and other North American Free Trade Agreement (Nafta) members?
They certainly could be affected, as could all countries with meaningful trade in exports to the US. Amidst the inflammatory rhetoric of the election, the persistent theme of “America First” was not empty. We should expect a change to the rules of the game regarding global trade. It is unlikely that every plastic toy and cheap T-shirt sold in the US will be made in the US. But there could be tariffs on Chinese steel or on cars assembled in Mexico, however difficult that would be under the current rules. Head of Old Mutual Global Equities at Old Mutual Global Investors in London
Could it create increased policy uncertainty?
Policy gridlock is far less likely now that the executive and legislature are in the same party hands. Trump’s is a different type of Republicanism though. Congress is dominated by Republicans who, unlike Trump, are fiscal conservatives. This nevertheless could lead to disagreements. House speaker Paul Ryan could end up being the effective opposition, that’s if he survives.
What are the implications for the Old Mutual Global Equity Fund portfolio?
We do not attempt to forecast binary events both because they are hard to get right consistently, and because the effect of these events can be opposite to what you expect (for example, a risk-on rally post Brexit was unlikely but happened). We remain convinced that the best way to manage with these highly uncertain markets is by understanding the impact of macroeconomic, geopolitical and company fundamental information on the market itself. This remains the best way to include changing sentiment, which gives the opportunity to best understand the types of stocks likely to be most attractive to investors at any point.
What is Brexit’s impact on the portfolio?
Equity investors began buying riskier assets as sentiment recovered quickly. This continued for most of quarter 3 and into quarter 4. The portfolio has followed this, selling some of its quality exposure and buying value stocks. We have also seen a fall in volatility across global markets. This allows the momentum stocks we removed towards the end of last year to be replaced in the portfolio. In all we are currently constructively placed in the fund, though including some hedging positions in the event of a sharp change.