While it is still difficult to predict what Trump’s foreign and domestic policy path will be, if he does take a more protectionist stance, particularly with China, the shockwaves will be felt across many emerging market economies.
What is likely, however, is that political uncertainty will be significantly elevated. His presidential tenure is likely to be fraught with tensions both within and outside the US. Previous attempts to raise the US debt ceiling, for example, have proven troublesome for markets and future efforts could be even harder to negotiate given the arguably needless tax cuts will add significantly to the overall debt burden above and beyond meeting interest payments. It is also not clear how Trump’s policies will de- rust the Rust Belt, which could have its own consequences if angry dissent sets in across Trump’s supporter base.
Trump has already proven himself to be easily baited even since his election victory, adding to the unpredictability of his leadership.
TURN OFF YOUR SCREENS
With the Trump era about to get underway, politics has returned as the key driver of markets. Volatility will most likely be higher for the foreseeable future. And politically- driven volatility is even harder to time than volatility linked to the economic cycle.
“Trading around political risk is very difficult,” says Royal London Asset Management’s head of sustainable investment, Mike Fox. “The chances of a Trump victory or a vote for Brexit looked very unlikely early in 2016.”
Where does this leave investors? Nusseibeh believes this environment, driven by political uncertainty, should strengthen the case for a buy-and-hold approach. The investment community has become used to an investment strategy that focuses on tactical asset allocation, best seen in the endowment model made famous by Yale and Harvard.
“You cannot do tactical asset allocation in a framework that is dominated by politics and politics has come back to loom large,” Nusseibeh says. “You can’t time volatility like this.
“Investors would do best to ignore the noise, ignore the volatility, take a 10-year view then switch off their screens,” he says. “And keep watching The Simpsons,” he adds.
INVESTORS NEED TO SET THE AGENDA FOR ADDRESSING CLIMATE CHANGE
President-elect Trump’s approach to climate change counts among the more alarming aspects of the US election outcome. Any threat to the COP21 agreements reached in Paris could have serious consequences for the fight to maintain global warming to two degrees.
“We have only got four years to achieve this goal,” says Saker Nusseibeh, CEO of Hermes Investment Management. “If Trump blows that out of the water, we have no chance.”
Royal London Asset Management head of sustainable investment, Mike Fox, points out, however, that there is already significant momentum behind the transition to a low-carbon economy, that, he says, “goes beyond politics”.
The fact that China, historically one of the most resistant to climate change policies and one of the heaviest polluters, has urged Trump not to renege on COP21 demonstrates the strength of feeling globally on the issue and how much progress has now been made.
Even at home, around 75% of all economic activity in the US derives from liberal, climate change believing states – California being the most obvious example. As long as Federal policy is not translated into state legislature, much of the potential harm Trump could wield can be limited.
But, even so, it is now more important than ever that capital allocators redouble their efforts to forge the kind of future the savers of today and tomorrow want to retire into.
According to research by Legal & General Investment Management, 81% of investors agreed that they wanted their pensions to be invested in responsible companies that will improve life for future generations.
“If governments are not going to act [to address climate change], then the owners and allocators of capital have got to step up,” Nusseibeh says.
