Trumped

We woke up yesterday to encounter another Ground Hog Day scenario. It wasn’t Brexit this time, but the rise of Donald Trump to the Presidency of the United States. Two different situations, but two entirely unexpected results (particularly if you were a Pollster). It would seem, that the “common man” or as Trump said “The Forgotten man and woman”, be they living in central USA or central UK, has had enough with the political and financial elite and have made their choices at the ballot boxes.

Interestingly we discussed the potential of a Trump victory at our last Investment Committee meeting in October. We put the probability of a Trump upset at “MODERATE” and therefore made no knee jerk decisions to change our current investment solutions. The reason is that there are two potential outcomes with Trump winning. The first is that, if the rhetoric during his campaigning is to be believed then foreign policy would shift fundamentally with a potential strong devaluation of the USD. The second which is almost diametrically opposed, is that the outcome is good for big business which forces the markets to rally with a continuation of the 3 year USD Bull rally. As you can see, fairly diverse outcomes from a risk we saw as unlikely to happen.

So what do we do now? The immediate impact was felt on the currency markets with the GBP and EUR strengthening to the USD (but only by a %). However, in the course of the day, the USD rallied against the major currencies and is back to the same levels as the day prior to the election. Prior to equity markets opening, the Dow Jones Futures index was initially significantly weaker, but has also strengthened as analysts attempt to digest the impact of the change. In fact, the day closed with the Dow Jones in positive territory! As we monitored the currency markets throughout the day, the volatility was obvious, but possibly not as extreme as the Brexit decision in June.

We read a very well balanced article re the future prospects of the global economy given this dramatic change, from the team at Investec which is worth sharing:

 “By contrast, a radical change in direction by the world’s largest economy is not so easy to dismiss. America’s embrace of open trade has been the most important locomotive force for the global economy in the post war period. Donald Trump represents a re-appraisal of this stance. There are few companies, global or local, whose response to this result will be an increased appetite for new investment. Increased risk-aversion will likely continue to weigh on growth until the extent of America’s turn inwards is better understood.

At the same time, investors’ assessment of future prospects will be coloured by soundbite-driven media. Trump’s most divisive rhetoric will be used to highlight the worst possible potential implications of the result. In this climate, an overshoot of pessimism is more likely than not. The risk of such an overshoot is particularly high in the very near term. Financial market stability would be best served by a seamless and dignified transfer of power. Investors worldwide will be looking to Donald Trump to display a very different, conciliatory side to his character to gain reassurance about the next four years.

Having painted a cautious picture, we should also provide suitable perspective. This is not the first time that America’s choice of President has puzzled outside observers – Ronald Reagan ultimately surprised everyone. Donald Trump is a maverick, but he can clearly get things done. With the Presidency and both houses of Congress under Republican control, the logjam in the American legislature that has existed for much of President Obama’s term is broken. At the same time, a fracturing of Trump’s support within his own party provides a check on his executive authority. Once the dust has settled, there is a good chance that the most polarising Presidential race in recent memory will result in greater cross-party cooperation in the legislature. Ultimately, restrained by both the American congressional system and the need to win over sceptical business interests, he will be incentivised to build bridges - quite literally if his fiscal plans are implemented. For America, the reality of a Trump Presidency is likely to be less bad than many currently fear.

It is our opinion that it is too early to make any drastic changes. The movements being experienced currently will be more emotively driven rather than fundamentally. We are currently structured relatively conservatively and feel no current need to down weight risk any further. Conversely, if the markets present an opportunity, we may consider adding to the equity portion of the portfolios.