Asset managers' reactions to Trump victory
The initial market response to the election result has been stark, with global equity markets moving sharply lower, bond yields receding and the Mexican peso weakening.
Leading
figures in asset management set out their expectations for the coming months.
Saker Nusseibeh, chief executive of Hermes:
Given that a US President’s effective executive power
is limited by design, markets should shrug off the results of this election
after a bout of initial volatility as they have done in the past.
Our fear, however, is that the consensus might
underestimate the fact that Trump could damage the economy in the long term,
despite the limited powers of a US President, through his political stances.
Governments rely on their reputation to reduce their
risk premium in capital markets. It is not a stretch to imagine him repeating
his campaign talk of renegotiating US debt. Although everyone knows such an
outcome is highly improbable, a President mentioning the idea might lead to
serious volatility in US Treasury markets and increase risk premia for US
assets.
Trump might create market volatility through his
pronouncements in the field of foreign policy, traditionally a preserve for
presidential authority. The assumption is that Trump will listen to advice from
professionals in the US State Department when dealing with foreign affairs, but
on the campaign trail he demonstrated a clear willingness to dismiss
professional advice.
Once again it is not a stretch to imagine Trump in
talking to his home constituency might alienate the traditionally supportive
Gulf nations with his Islamophobic comments. This might then strengthen Iran’s
influence in the region, which could threaten regional stability and therefore
the oil price.
Likewise, Trump’s anti-NATO and pro-Vladimir Putin
comments could be taken, if repeated when he is in power, as a green light by
the Russian President to intensify his revanchist foreign policy in Eastern
Europe. This in turn could lead to rising risk premia for European assets.
David Lloyd,
head of institutional fixed income portfolio management at M&G Investments:
Much of what Trump
has said suggests that the balance of risks is towards a more hawkish Fed. In
the short term the market will obsess over whether Trump’s rhetoric softens
somewhat – i.e. will he try to forge a constructive working relationship with
Yellen? If he sticks with his campaign tone, the rates market could get quite
lively.
In the short term,
the issue is around growth prospects, rather than growth per se. One might
expect to see a short-term reaction in business and consumer confidence
indicators, but it will – obviously – take time for actual impacts to land.
Further out, a meaningful fiscal boost (infrastructure etc.) would obviously register in domestic growth numbers. Globally, the situation is potentially more perilous if Trump intends (and is able) to deliver on his anti-free trade, anti-globalisation narrative. At a time when global trade is stalling, a policy push would create headwinds. Also, a move to genuinely protectionist trade policies (which would prompt countermeasures elsewhere) has clear potential to put upward pressure on inflation.
Although somewhat off the extremes, bond yields remain extraordinarily low by any historical measure. Consequently, the asymmetry of risk is fairly clear. In the short term, we might reasonably expect credit spreads to widen somewhat as the markets apply higher risk premia to risk assets generally.
Further out, my own view is that the main
risk to fixed income comes from rates/Treasuries moving to a higher rate
structure, rather than a perception that the market needs to price-in
increased default expectations.
David Kelly, chief global strategist of JPMorgan Asset Management:
The question for investors is the long-term outlook in the wake of the US elections.
First, the US economy that President Trump will inherit is in pretty good shape. Real economic growth has picked up in recent months while the 4.9% unemployment rate is close to full employment. S&P500 earnings have rebounded smartly from the oil & dollar slump of 2015 and inflation is moderate. The global manufacturing PMI index hit a two-year high in October. Absent political uncertainty, all this would be positive for stocks and negative for bonds.
Second, the uncertainty and volatility following the US election will, for now, reduce the probability of a Federal Reserve rate hike in December, although the Fed will want to leave its options open.
Third, while a Republican sweep, actual policy change may be far less dramatic than proposed. There is a wide gulf between Mr Trump and many ‘establishment’ Republicans and the latter may well balk at unfunded tax cuts or spending increases. Both the new President and Congress will likely act more slowly until better alternatives can be found.
Congress may be willing to go along with some Mr Trump’s proposals. If it does, it may well further stoke inflation in an economy which is already heating up. Longer term, increasing government debt to fund these initiatives has obvious dangers.
The knee-jerk reaction of investors was to sell US and global stocks and buy Treasuries. However, in the medium term, a warming economy, further stoked by expansionary fiscal policy could favour the former over the latter. In the long-run, investors would do well to make sure that they are well diversified outside of US stocks and bonds and that they have sufficient exposure to alternatives and international securities. 2016 has proven decisively that populism is a good political strategy – whether it proves to be good for long-term economic fortunes is another question entirely.
Lars Kreckel, global equity strategist in Legal & General Investment Management’s asset allocation team:
Uncertainty
typically declines quickly after an election, but in this case the possibility
of unexpected announcements, sudden policy changes and ill-advised comments is
likely to be a feature for some time to come. It is a cliché that markets don’t
like uncertainty, but we would now expect a higher risk premium for US assets.
For
equities, some of this effect should be offset by the prospect of higher
earnings growth, driven by a significant fiscal stimulus package, although we
still expect a net negative effect.
On the one
hand investors may be put off holding US dollar-denominated assets with greater
domestic uncertainty, while on the other hand the dollar could benefit from
Trump’s proposal to encourage US corporates to repatriate some of their
overseas cash holdings.
It’s a
similar story for fixed income. While an initial risk-off reaction has pushed
bond yields down, it strikes us that many of Trump’s policies could ultimately
be inflationary. The increase in current uncertainty has reduced market
pricing of a Fed rate hike in December, but the longer-term inflationary
pressures could lead to a faster path of rate hikes once markets and
circumstances settle down.
Much of the medium-term market impact hinges on the policy mix Donald Trump will ultimately implement. As Trump describes himself as ‘totally flexible on very, very many issues’ it will take some time until we know how much of the pre-election rhetoric will be transformed into actual policies.
Pioneer’s
CEO and Group CIO, Giordano Lombardo:
While the US election outcome is a
surprise, it is by no means a black swan event. Markets had been strangely
complacent leading up to the election, which was highly reminiscent of the
pre-Brexit build-up.
Ian Kelly, CEO of Augentius,
on what it means for the private equity market:
We don’t
believe the election of Donald Trump as US President will have any significant
long-term effect upon the ongoing strategies followed by private equity. Private
equity has proven to deliver very good long term performance to its investors
through both favourable and challenging times.
While the
equity markets and other traded securities may be faced with short-term
volatility in the immediate weeks to come, private equity works along a 10-year
horizon and is built to survive a range of market conditions.
Reaction will continue to be posted
throughout the day.
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