Trump turmoil may reset risk calculus
LONDON: The turmoil in Washington surrounding Donald Trump’s presidency is rattling world markets, and the burst of volatility could force investors into a strategic or tactical rethink of how much risk they are happy to face.
Increasingly damaging revelations about the dealings of the Trump administration and his election campaign team with Russia last Wednesday triggered the biggest fall on Wall Street since last September and a stock market slump around the world.
After months of major stock markets posting record highs and historically low volatility, a reversal was always on the cards.
Now that it has come, the question is whether it ends up being a one-off or marks the start of a prolonged reversal in which investors cut back on risk and adopt more defensive positions.
A broad U-turn would likely require one or a mix of the following scenarios: impeachment proceedings against Trump get under way, his growth-boosting legislative reform agenda is delayed, and the US economy begins to contract.
It remains to be seen if and how any events might play out. But the “Trump trade” that lifted stocks, the dollar and bond yields has evaporated. Investors are now bracing for stormier weather.
“We have to be cognisant of volatility. It’s a question of keeping risk levels appropriate, and that’s something we were doing anyway,” said James Athey of Aberdeen Asset Management in London. He has cut back on short positions in safe-haven fixed-income assets and the Japanese yen in recent weeks.
Joost van Leenders, a strategist at BNP Paribas Investment Partners, which oversees €580 billion, said he and his colleagues were discussing US political risk on a daily basis. “We were cautiously positioned to start with, so for now we don’t have to change our position, but I do not rule out future changes,” he said.
Some, like Tom Wu, chief global investment officer at Yuanta Securities Investment Trustin Taiwan, aren’t holding back.
“An impeachment might happen, or it might not. Any uncertainty, including this uncertainty, is something that investors don’t care for. So we’ll be unloading all of our holdings in US stocks this month,” he said.
Few investors will follow that example, but many reckon US markets are expensive. The US economy is already into its third-longest expansion ever but not many surprises appear to be left. US corporate earnings growth is lagging that of the euro zone, where the political turmoil that was supposed to occur this year has not happened.
“Part of the correction is welcome because from a valuation standpoint, the US equity market was in bubble territory,’’ said Didier Borowski, head of macroeconomic research at Amundi, Europe’s largest asset manager.