Financial markets reacted negatively in the immediate aftermath of Donald Trump being elected president of the United States before rebounding slightly after his victory speech in which he pledged to be “a president for all Americans”. But what is the longer term impact on financial markets and asset classes likely to be?
There were initial falls across global equity markets and S&P 500 futures were down 5% while the Japanese Nikkei also shed 5%. Bond yields also reacted in risk-off fashion: US 10-year yields fell by 14bps to 1.71%; German bunds by 9bps to 0.09%, Japan by 2bps to -0.09% and UK by 6bps to 1.17%.
Elsewhere, the dollar plummeted on the news dropping value against the euro, sterling and yen, while the Mexican peso also sold off heavily. Investors also embarked on a flight to quality, with assets such the Japanese yen and gold climbing.
Markets were buoyed a little after Trump’s speech in which he pledged to be “a president for all of Americans” to “rebuild our infrastructure” and “put millions of our people to work as we rebuild it”.
The dollar strengthened on the announcement, clawing back all its losses against the pound, while Trump’s words helped contain the FTSE 100’s fall to around 1% after its earlier 2% drop in the aftermath of the victory announcement.
But how will the election result affect financial markets and asset classes in the longer term?
Political damage
Hermes Investment Management chief executive Saker Nusseibeh said markets should shrug off the results of the election after a bout of initial volatility. However, he added: “Our fear is that 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.”
Neuberger Berman (NB) said market volatility may endure for a little longer, but could deliver buying opportunities, as already demonstrated by the “Brexit playbook”.
NB president and chief investment officer – equities Joe Amato added: “The biggest risk, of course, is Trump tries to turn some of the more populist rhetoric of his campaign into reality. Whoever had emerged victorious today, the forces that have led to the rise of the likes of Trump, Sanders, Farage in the UK, Le Pen in France, and Wilders in the Netherlands are not going away – and partisan shouting matches, assaults on free trade, an interventionist approach to unsustainable industries and a disregard for the financial robustness of the US are not viable solutions.
“The result could be a tug of war between the deflationary forces associated with lower economic activity and the inflationary forces from higher trade barriers.”
But is Trump ‘more rhetoric than reality’?
Despite short-term uncertainty, The Boston Company Asset Management senior portfolio manager John Bailer said while it is impossible to say at this point how any of the new president’s plans might work out in practice, overall, he felt much of what was said in the run-up to the election was “more rhetoric than reality”.
“We believe the composition of Congress is as important as the President for economic policy,” he added. “A victorious Donald Trump with a Republican congress will be conducive to business-friendly policies.”
Equities: a buying opportunity
SYZ Asset Management estimated a downside risk of 5-7% for global equities over the next two or three days. Chief investment officer Fabrizio Quirighetti said US assets should now trade significantly lower but, as usual, thanks to their defensive nature, they may outperform in relative terms.
Quirighetti added: “The S&P 500 may fall to 2,000 and, in this case, we expect other markets to experience about 10% decline before stabilising. Geographically speaking, EM equities, especially LatAm and Asia, will be among the major losers. Europe, especially Switzerland, and Japan may also experience severe setbacks, especially if currencies tend to get much stronger against the greenback over the next few days.”
Old Mutual head of global equities and manager of the Old Mutual North American Equity fund Ian Heslop, said active managers have “a great opportunity” at the moment because there is a lot of mispricing in North America in terms of equities.
“Although North America as a whole is not cheap, there are cheap areas of North America that can be exploited by investors who are nimble enough,” he said.
Fixed income
Legal & General Investment Management (LGIM) global equity strategist in the Asset Allocation team Lars Kreckel said while an initial risk-off reaction has pushed bond yields down, many of Trump’s policies could ultimately be inflationary. Protectionist policies could drive up import prices, anti-immigration policies could boost domestic wages and significant fiscal stimulus could add further to inflationary pressures, he said.
“However,” he added, “all of these are second-round effects that could take time to materialise. This divergence between short-term and medium-term risks is also reflected in Fed expectations. 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.”
In terms of credit, M&G head of institutional fixed income portfolio management David Lloyd said in the short term it would be reasonable to expect spreads to widen as the markets apply higher risk premia to risk assets generally.
He added: “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.”
Emerging markets
Pioneer Investments head of global asset allocation research Monica Defend said the election outcome may lead to increased interest rate volatility which may weigh on EM currencies, while a strong shift to protectionism may also hurt many export-oriented EM companies, not only in Mexico.
She added: “We believe Trump’s policy agenda – although still unclear – may be bearish for income-related investments and could lead to a steeper yield curve.
“We think gold is a key structural hedge against additional spikes in volatility and recommend a focus on active management, an overweight to quality assets and believe an emphasis on downside risk mitigation will be crucial in the next few months.”
Multi-asset
Royal London Asset Management head of multi-asset Trevor Geetham said the risk-off move could run for a while, but the firm’s multi-asset funds look to buy stocks on signs of panic, and a classic contrarian buy signal is developing.
“We had lightened up equity exposure a week ago, when the markets were pricing in a Clinton victory, so will look to redeploy those assets and possibly more at lower prices. We are likely to add to our overweight in the emerging markets equities, where dollar weakness is a positive. With global growth picking up and inflation starting to rise, commodities could also do well for a while.
“If Brexit provides a roadmap for investors, stock prices could be making new highs again by year end.”
Keep your cool
Aberdeen Asset Management senior investment strategist Richard Dunbar said a lot of the immediate selling will be irrational and urged “now is the time for cool heads”.
“The US remains the country from which virtually all disruptive technology over the last 50 years has emerged; where the rule of law is sacrosanct; with relatively favourable demographics; and broad and deep pools of capital,” he said. “None of these things have changed as a result of events overnight.”
