Luzia Hetjens, senior portfolio manager at Commerzbank Asset Management explains how the team responded to the aftermath of the US elections and how the political changes in the US will affect their asset allocation strategies going forward.
Financial market responses following the surprise victory of Donald Trump as new and 45th president of the United States indicated very clearly: Market participants have learnt their lesson from the „Brexit“referendum, taking significant precautionary measures prior to the elections. As a result, market responses were less volatile than those to the British referendum.
Even though results of the election are now official, political risks on capital markets remain persistent. These are reflected in a number of key questions which will have to be raised based on Donald Trump’s campaign slogans: Will we see a liberalisation of healthcare policies, restrictions of international economic agreements and a more expansive fiscal policy? It remains questionable whether Donald Trump will be in the position to realise every single one of his rather aggressive campaign promises.
Ultimately as always in life, compromises will need to be made. Consequently, in the days following his election, the future president has already started to take on a much more moderate stance compared to the election campaign and the coming weeks will provide further clarity. We think that the initial responses to his election are not necessarily sustainable, today’s losers may soon become tomorrow’s winners and vice versa.
Our robust and defensive positioning has proven itself throughout the year. The strategic investment structure was already positioned towards the emergence of a global reflationary environment. Prior to the US elections, we subjected our portfolios to a thorough assessment, given that we anticipated the result to be a close call between the two leading candidates.
However, we concluded that a change of emphasis or even a repositioning of our portfolio would not be required, regardless of the election outcome. Both US equities and bonds constitute central cornerstones of our investment strategy and we decided to continue holding them. Moreover, following a period of solid returns, we have already adjusted our defensive portfolios in late summer- autumn by reducing risks and conducting targeted purchases of gold in opportune moments as an additional hedge.
Given the conservative positioning of our investment strategy and the predictability of an increase in volatility similar to the Brexit scenario, we decided prior to the US elections to introduce targeted hedging measures by adding short ETFs on European stock market indices which are compared to the US relatively more volatile. As the insured event (market risks due to the election of Donald Trump as US president) materialised, we immediately sold these hedging instruments at a profit as markets opened on the 9th of November 2016.
We subsequently introduced further adjustments in order to anticipate the possible impact of Trump’s intended policy measures:
First, an increase in government spending will lead to a hike in interest rates. This has already been reflected in fixed income markets, with ten year Bunds increasing by 50 basis points over a short period of time. We used this opportunity in order to sell our short ETF’s on Bund futures which we had bought in the event of a persistence of low interest rates.
Second, we anticipate a liberalisation of the health care reforms introduced by Barack Obama. Due to the sectors ‘generally positive long-term growth prospects, we have already been moderately overweight and have now further increased our positions.
Overall, our portfolios currently have a relatively short duration exposure on the fixed income side, a lower beta on equities while we maintain the continued addition of gold, reflecting our expectations of moderate economic recovery. Over the coming weeks, we will make targeted adjustments by adding other attractive asset classes. All in all, our excellent risk management has yet again stood the test of the US elections.