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?

Finweek English Edition - - FUNDFOCUS -

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.

Ian Hes­lop

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