Trump victory and initial responses: Markets anticipate delay in rate hikes
Markets called it wrong for the second time this year, being caught by surprise by a Republican victory in the US presidential election, as they were in June following the UK’s Brexit decision.
While the initial stock market response in Europe remained moderate, with the CAC40 and DAX30 falling by about 2% respectively and the FTSE 100 initially dropping to -0.5%, asset managers and financials suffered some of the sharpest losses.
International Investment and sister publication Investment Europe is publishing a rolling series of responses to the overnight victory by Donald Trump in the US presidential election.
Stefan Kreuzkamp, CIO at Deutsche Asset Management acknowledges the surprise impact, but cautions against panic responses: “…we do not think that investors should lose their nerve. Let us not forget that the key constant in Trump’s election campaign was to continually surprise the public. It is entirely possible that after his election, he could in fact surprise markets on the positive side. Our hopes are based on Trump’s pragmatism, his ability to adapt and his generally limited political allegiance. There is a chance that he could allow the political veterans in Congress to pass a fairly classical Republican campaign program,” he stresses.
Mike van Dulken, head of research at Accendo Markets adds: “Equity markets are negative, but nowhere near as much as you might expect, as investors digest news of a Trump Presidency. A FTSE100 close to breakeven, having rallied 300pts from its overnight lows, and a DAX and DOW nursing what can only be described as minor losses in comparison to all those apocalyptic forecasts, looks a decent outcome.
If anything, what’s happened bears eerily similar hallmarks to Brexit; complacency, surprise and panic followed by swift recovery. If anything it’s happened more quickly this time. Could Trump prove less controversial now all those populist votes have been won?” he questions.
John Bailer, senior portfolio manager, The Boston Company Asset Management comments “With Trump’s election, we expect markets to pull back due to short-term uncertainty. However, it’s not a reflection of the fundamentally sound US economy. The US has full employment and rising household formations, which has positive knock-on effect for other sectors. When coupled with low inflation, we believe the US economy can grow at around 2% without overheating” he argues.
However, German insurance giant Allianz Global Investors expresses a more bearish outlook: “Given the unknowns and unpredictability surrounding Trump, we expect to enter a “risk-off” environment with higher volatility and greater demand for “safe havens” like gold and US Treasuries. Hospital stocks could be hit hard, given Trump’s repeated calls to put an end to “Obamacare”.
After the initial shock settles, Wall Street will likely look forward to Trump’s proposed tax reforms, and to the prospect of some Congressional Republicans counterbalancing some of Trump’s more extreme views. Further out, markets will probably start to adjust for deglobalization risks, which could weigh on equities, and inflation risks, which could affect bonds. However, much depends on how effectively Trump can sell his ideas to a Congress that, while Republican in name, may not be entirely on his side” the group stated.
Trump winning the US presidency is a bigger deal than Brexit, expect enormous volatility, but also important financial opportunities, according to Nigel Green, CEO of Dubai-based financial firm deVere.
“Buckle up for a bumpy ride in the global markets,” said Green. “Whether President Trump will, in fact, do what he has said he will do throughout his campaign, or whether it was just soaring rhetoric to whip up his support base, for now, Trump winning is sending shockwaves across the world. As such, enormous volatility can be expected in the markets.
“The Brexit result was a real shock and created instability in the UK. But this is a far bigger deal as this creates instability on a much wider, international scale.
“The markets’ main concerns include Trump’s protectionist policies, focusing on potential trade wars with China – America’s largest trading partner – and with Mexico, it’s third largest. In addition, with Trump having said certain countries are ‘cheating’ due to their undervalued currencies, currency tensions should also be expected.”
He continues: “Whilst some people are put-off investing because of volatility, many of the most successful investors welcome it. This is because major buying opportunities are always found where there are fluctuations.
“Fluctuations can cause panic-selling and mis-pricing. High quality equities can then, for example, become cheaper, meaning investors can top up their portfolios and/or take advantage of lower entry points. This all, in turn, means greater potential returns.
“A professional fund manager will help investors take advantage of the opportunities that volatility brings and mitigate potential risks as and when they are presented.
“Anyone serious about enhancing their finances should be using this somewhat unexpected turn of events to create, maximise and protect their wealth.”
Green concludes: “As ever, the best way to benefit from the inevitable key opportunities and sidesteps risks is through real diversification – this includes across asset classes, sectors and geographical regions.”
For fixed income investors, the impact of Trump’s victory has so far been paradoxical, as Jim Leaviss, head of Retail Fixed Interest at M&G Investmentsargues: “As expectations of a Trump win grew last night, the US Treasury market rallied aggressively. You might think this perverse given that Trump has openly discussed “haircutting” Treasury investors, but this is a flight to quality response. The Fed was seen as nailed on for a 25 bps hike in December, but the uncertainty impact of a Trump win makes this much less likely (and will Janet Yellen still be head of the Fed under a Trump regime?). The implied probability of a rate increase has fallen from over 80% to 50%. Rate expectations have fallen for 2017 too.”
David Zahn, head of European fixed income at Franklin Templeton Fixed Income Group adds:Looking at the longer term implications of the Republication victory for Europe, there are a few immediate questions. Notably, regarding trade and international relations. Trump has taken the stance that overseas US partners should increase military spend. This could have a knock on impact for Brexit negotiations, as we might see the UK and Europe wanting to maintain more a group mentality, given the UK’s relatively large military spend in comparison to Europe.
The fact that a delay of the Federal Reserve rate hike has now become more likely could also be beneficial for some emerging markets, as Jason Pidcock, manager of the Jupiter Asia Pacific Income SICAV fund points out: “Paradoxically, such a scenario might create an ideal environment in which the Jupiter Asia Pacific Income Fund could flourish; bond prices would be pushed up, yields would fall and investors seeking income would be practically forced to continue to search for yield in equities. Then again, what good is outperformance when you’re only able to do so on a relative basis against a turbulent market.”
Nevertheless, NN IP cautions against being overly optimistic and highlights the dangers for countries with a strong regional exposure to the US: “Emerging markets and related assets are particularly vulnerable, as investors fear protectionist measures that would seriously impact US imports from emerging economies. Most exposed are the economies that export most to the US. The clear standout here is Mexico, which sends 82% of its exports to its northern neighbour. The country’s export sector is a primary source of employment and export growth has to keep up with import growth to prevent an excessive widening of the external imbalance. China is also sensitive to possible changes in US trade policies. About 18% of Chinese exports go to the US. With China’s domestic demand outlook not particularly bright, the country needs to post decent export growth to prevent a sharp economic growth slowdown” NN IP warned.
Rob Boardman, European CEO of equities broker ITG, said that: “Trump’s shock victory has led to a very busy open, with 3x the normal volume in the first 30 minutes of trading. Fast money flows are driving the volume, but there have been relatively few block trades.”
“Many stocks, especially Swiss, have extended auction periods. Healthcare stocks have opened strongly, reversing some of the losses in recent weeks.”
Fabrizio Quirighetti, chief investment officer at SYZ Asset Management, said: “This unprecedented presidential race has finally come to an end and, once again, the anti-establishment vote has been underestimated by polls, journalists and analysts as the winner is Donald Trump. The first thing that comes to our mind is ‘hope for the best, but prepare for the worst’, as the campaign has provided many evidences Trump could be a terrible president.”
“His victory, to an extent, is also the symbol of current political failure to address key socio-economic challenges. It clearly has raised uncertainties – at least in the short term – not only about the current economic backdrop, but also in terms of geopolitical developments going forward. As a result, elevated volatility across global markets may prevail for the next few days and probably bring interesting opportunities if assets valuations reach exaggerated depressed levels at some point.”
“The immediate reaction now is to sell risk, especially EM assets, and buy safe-haven assets such as US treasuries and gold. Medium-term, his administration could be characterised by a powerful reflation trade, with a higher bond yields.”
“We estimate a downside risk of 5-7% for global equities over the next two or three days. US assets should now trade significantly lower but, as usual, thanks to their defensive nature, they may outperform in relative terms.”
“It is clearly devastating news for the Mexican peso and is a bad hit to the Canadian dollar. MXN may now trade much above 20 against USD and remains quite volatile over the next few days. RUB and some Asian currencies, such INR, should prove somewhat resilient in the EM space.”
‘One of greatest political shocks’
Donald Trump’s victory is arguably one of the greatest political shocks in recent times, according to Christopher Mahon, director of asset allocation research, Barings, Multi Asset Group
“For Trump, this win is the culmination of a journey that defied the odds at every turn. His first victory was in taking over the Republican Party, largely against the will of the Republican governing class,” said Mahon. “He has now used this momentum to take control of the highest political office the world has to offer.
“In achieving victory, Trump has defied the political class, pundits and markets alike. Rightly or wrongly, his chosen narrative has been simple — globalization is the cause, inequality is the effect. It is a theme that we saw first in the riots and referendums in Greece, which then found firmer footing in Brexit, and has now reached its climax in America,” he said
“It is clear that this next president will have a profound effect on global markets. Trump’s mandate promotes political and economic isolationism, presidential powers that do not need the support of Congress. Markets will hope that his desire to be re-elected will create some balance. Otherwise, in one movement, globalization and the liberal economic consensus is in full retreat.
“Trump’s trade policy is one area of immediate concern for markets. His most well-known campaign rhetoric involves building a wall between the U.S. and Mexico, increasing deportations and tearing up NAFTA.
“Outside of North America, a tougher stance on China via the introduction of tariffs and duties could significantly impact emerging markets. Trade deals with the EU and Japan may also be at risk,” added Mahon.
“Markets will likely take some respite from Trump’s fiscal policy, which he is expected to loosen as he follows through on his campaign promises. Over the near to medium term, we expect Trump to introduce aggressive tax changes, including substantial cuts to both corporates and the wealthy, and a significant stimulus package for infrastructure that will likely be debt funded.
Markets should also be prepared for a more hawkish Fed, which is a logical response to a more deficit-reliant administration. It is likely that Trump’s ascendancy will be an end to Janet Yellen’s tenure, either prematurely or by his refusal to nominate her in 2018. Yet a hawkish Fed is unlikely to go hand in hand with a stronger dollar. Ultimately, a confrontation with the Fed is likely to lead to uncertainty and a weaker dollar, even in the face of tighter monetary policy. If handled poorly, international investors may even question the default position of the dollar as the world’s reserve currency,” said Mahon.
Ohio-born Jean Liggett, CEO of UK’s Properties of the World, said: “The US economy remains the force that sets the pace for the rest of the world. Even with the rise of China and the growth of other emerging markets, America is still the strongest economy in the world.”
“Donald Trump’s US presidential election victory raises concerns over the impact of this outcome for global economies, including that of the UK. Today’s Trump victory is likely to cause market trepidation around the world. Many companies and investors may look to move their investments and companies, at least in part, out of the US to safer havens.”
“Trump’s election could generate a significant movement in the US dollar and potentially jeopardise US diplomatic relations across the world.”
Trump’s victory may well prove beneficial for the UK property market, as investors seek to migrate their portfolios from the US to a more secure and predictable market – the UK, according to London Central Portfolio CEO Naomi Heaton.
“This may even mean that the sterling could rise in value,” she said. “Under Trump’s stewardship, ‘predictable’ may need to be removed from the US English dictionary for the next four years. Only time will tell how the US property market – and others around the world – respond to his election victory.”
‘Positive UK property impact’
“Given the unprecedented turn of events as the US Election result is announced, the London property market will clearly not be top of your agenda today. However, it is London Central Portfolio’s view that there will be a net positive impact on the market as investors retrench to blue-chip tangible assets as uncertainty on the political and economic stage is heightened once again.
“Jitters in global equity markets driven by widespread speculation will be countered by flights to safety, with gold, the Yen and Swiss Franc set to benefit. Whilst the result will likely move the global spotlight away from Brexit, repercussions may be felt across Europe with the prospect of anti-establishment votes becoming keener. At the same time, the likelihood of the UK Parliament thwarting the people’s mandate to exit the EU has dwindled.
“Whilst all of this plays out, Prime Central London property, a traditional safe haven, is expected to benefit from a similar flight to quality, asset-backed investments,” added Heaton.