Didier Saint-Georges (pictured), managing director and member of the investment committee of Carmignac, commented the positioning of the Carmignac Patrimoine fund after Donald Trump has been elected as the 45th US president on 9 November.
Saint-Georges first noted that economic growth has been almost disappointing everywhere for the past eight years despite the economic stimulus of central banks through quantitative easing and rock-bottom interest rates.
He said every new election seems to offer the opportunity to push a different economic agenda focused on more fiscal stimulus and, in some cases, less open borders.
Donald Trump’s victory is therefore a symptom of broader failure, suggested Saint-Georges. According to him, it attests to a rejection of the neoliberal globalisation “regime” that has speed up since the 2008 crisis.
“In a telling sign of the shift under way from monetary to fiscal support, industrial and cyclical stocks have bounced back from the lows hit in January and February to outperform stocks in other sectors, helped by cyclical stabilisation in the world economy.
“The election of Donald Trump has reinforced the trend. However, the populist rhetoric campaign of the President elected is actually accompanied by a program that is much less so. Although, a strong fiscal stimulus is foreseen, it will initially be implemented as tax cuts, above all for companies, in addition to higher infrastructure spending and therefore rising budget deficits,” he commented.
What the Trump regime means?
Saint-Georges believes Trump’s program will lead to further yield widening in long term rates. Risk has been cut in Carmignac’s fixed income portfolios and a short position has been initiated and strengthened on US sovereign bonds.
“A Trump presidency, which includes a powerful fiscal stimulus programme, tax cuts and protectionist measures, can be seen as an accelerator of the trends we identified this past summer.
“We will therefore be maintaining our negative interest-rate sensitivity. At the same time, we will continue to actively manage allocation to our three key fixed income performance drivers, i.e., subordinate debt issued by European banks, European CLOs and emerging market debt, primarily from commodity-exporting countries (for
which we have significantly reduced our foreign exchange risk),” said Carmignac’s managing director, speaking of the Carmignac Patrimoine fund.
Saint-Georges argued the Trump regime will be synonym of support for commodity stocks as well as stocks benefitting from infrastructure spending and domestic growth stocks more broadly.
Since the US election, Carmignac has rebalanced the equity compartment of the Carmignac Patrimoine fund towards more cyclical companies, while keeping a close watch on the already high valuations for specific stocks and/or industries.
Saint-Georges said the firm will pursue investments in emerging market equities despite high volatility experienced in the aftermath of Trump’s election.
Carmignac’s investment committee member pointed three risks to monitor ahead of 2017.
“First, the pace at which sovereign bond yields increase will have a determining impact on stock market trends. Equities could withstand a controlled rise in yields, but only if it takes place in anticipation of an economic upswing, rather than just as a reaction to monetary policy normalisation and to mounting budget deficits.
“Second, the high level of global government debt is an issue that might make it hard for investors to gain a clear sense of how sustainable that government debt is.
“Third, the protectionist measures championed by anti-establishment parties in various countries could eventually bring about a falloff in world trade that would penalise all exporting countries, first and foremost emerging markets,” Saint-Georges concluded.