US election reaction: what does this mean for investors?
John Stopford, Head of Multi-Asset Income, and Philip Saunders, Head of Multi-Asset Growth at Investec, provide global perspectives on the effects of the US election on markets and portfolio positioning, whilst key portfolio managers share their views on gold as a beneficiary, the impact on EM currencies, and the resilience of Quality companies.
John Stopford, Head of Multi-Asset Income & manager, Investec Global Multi-Asset Income strategy
John Stopford, Head of Multi-Asset Income & manager, Investec Global Multi-Asset Income strategyA Trump victory is now declared, with both the House and the Senate set to remain under Republican control. Our view is that there are parallels between Trump and Brexit, with a likely initial shock being followed by a more mixed reaction as it is still unclear what president Trump might actually implement and how much support Congress will have for his plans.
The markets had put a relatively low probability on a Donald Trump victory with the majority of reputable polls having indicated a win for Hillary Clinton. As a result, we are not surprised by an initial shock reaction hitting most risk assets such as equities and the currencies of areas at risk from Trumps policies such as Mexico, Asia and Canada. We believe, however, similar to Brexit, that the initial panic may be followed by a recovery of sorts as the market tries to price in the uncertainty around how much Trump will follow through on his campaign promises and the extent to which he can expect for support from a Republican Congress.
Global economic implications
In the medium term, President Trumps protectionist agenda may weigh on global growth if pursued, with looser fiscal policy providing some offset. In combination, these measures could also lead to higher inflation. For now, we believe that the global economy will continue on its current path of a synchronised pick-up in growth, which should help market sentiment. However, this election result reinforces the sense that populism is on the rise globally and concerns are now likely to focus on ?how this phenomenon will impact other forthcoming elections.
Implications for income investing
Strategically, our portfolios have a modest growth asset bias with a lower than normal interest rate risk, within the constraints of a conservative overall targeted level of risk. In response to narrowing polls, we added a small number of tactical hedges on top of our strategic positioning to reduce risk modestly ahead of the election and provide downside risk protection in the event of a Trump presidency. These hedges included a sale of equity futures, reducing our net equity exposure; and short positions in a basket of vulnerable Asian currencies. As we moved closer to election day, the risk of Trump winning rose. Subsequently, we increased these hedges, this included selling additional equity futures (reducing our net equity exposure further), adding interest rate risk through US Treasury futures, and buying a small amount of Japanese yen and Swiss francs in addition to closing our modest Canadian dollar exposure. Overall, these hedges had the effect of taking down our expected risk, estimated by our risk systems, by about a quarter. We plan to use current market weakness to reduce our hedges and move back to our underlying strategic exposure.
Philip Saunders, Head of Multi-Asset Growth, and co-Manager, Investec Diversified Growth Strategy
Implications for growth investing
Towards the end of the third quarter we reduced the portfolios duration (interest rate sensitivity) on both valuation grounds, as we hit target yield levels for key positions in Canada, but also a changing environment for quantitative easing policies. At the same time, we raised cash by selling equities in Europe and US through futures to reduce overall portfolio risk. Coming into this quarter we reduced duration further removing a position in South Korean 10-year government bonds and reducing Australian government bond exposure.
With the increasing risk of Trump winning we added to our equity hedges, and adding back into duration exposure. We considered buying equity options, however, implied volatility of equities has increased by significantly more than can be explained by movements in underlying equity prices (realised volatility) in the run up to the US election, demonstrated by a sharp increase in the VIX index despite a comparatively small decline in the S&P500 index.
Our position in gold is viewed as a further hedge as well as hedges in place through the North Asian currencies such as the Korean Won, Taiwan Dollar and New Zealand Dollar which have been added to since quarter end. We also hedged back our exposure to the Russian ruble and South African Rand which are associated with our Emerging Market (EM) ex Asia basket, while not changing the underlying equities and retaining India and Indonesia as outright long EM currency positions.
Whilst it is still unclear what president Trump might actually implement and how much support Congress will have for his plans, he would likely garner support for his policies on lowering personal and corporate income tax and this is supportive in the medium term for equity markets. Our underlying market views, supported from both the top down and the bottom up, are quite positive towards growth-orientated assets, and cautious towards duration. This reflects evidence that the global economy appears to be moving into a period of better real (excluding inflation) and nominal growth, with reasonable value in many Growth assets, but a risk of some further repricing lower in government bond prices. We plan to use current market weakness to re-risk the portfolio through our preferred areas and those most impacted beyond that which underlying fundamentals would suggest.
Tom Nelson, Head of the Investec Commodities and Resources Team
Natural resources a source of attractive diversification
We believe that investments in the natural resources sector continue to offer attractive diversification in the current environment. While we do expect short-term volatility in commodity prices driven by associated moves in the US dollar and equity markets, we dont believe the result in the US election will be a key driver in the forecast of medium-term commodity prices.
Gold likely to be a beneficiary
As a safe-haven asset, gold is perhaps the exception as we expect to see continued volatility post-election. Gold is typically well supported when uncertainty grows around the outcome of an event, as was seen in the unexpected outcome of the UKs Brexit vote. However, the ultimate driver of the gold price is the outlook for global interest rates and inflation with the US Federal Reserves (Fed) rate cycle a main determinant. At a company level, we continue to focus on companies with improving profitability which can grow shareholder value through the commodity cycle.
Given the lack of clarity on Donald Trumps policy framework, uncertainty and volatility will define the immediate market reaction. Gold will continue to be the main beneficiary in this environment and this volatility could also affect the Feds December rate hike decision. US mining and the oil and gas sector should be more resilient than others given Trumps protectionist stance towards the US heavy industry. Furthermore, broad commodity prices could see support from a weakening dollar. However, renewable energy companies, in the US and globally, could suffer given Trumps position on climate change and the lack of support for renewable energy.
Clyde Rossouw, co-Head of Quality, and co-Manager, Investec Global Franchise Strategy
Quality companies offer defensive growth characteristics and resilience
We did not make any material portfolio changes in the lead-up to the election given our long-term, bottom-up Quality focus, and do not expect to make any material changes now that the result is known. Our Quality investment approach focuses on seeking cash generative companies able to sustain high returns on invested capital, with typically low sensitivity to the economic and market cycle. The performance signature of the global Quality portfolios has historically been one of participating meaningfully in up markets, with smaller drawdowns in down markets, with lower-than-average volatility. We believe the historic defensive growth characteristics and resilience of the companies we invest in will position them relatively well through the volatile market conditions we are likely to see.
Mike Hugman, Strategist, Investec Emerging Market Fixed Income Team Trading overnight has unsurprisingly been volatile, with the Mexican peso taking the brunt of this, selling off at around 12% at the time of writing. So far at least other emerging market currencies have also unsurprisingly sold-off, but within the ranges that we had used to stress test the portfolio in the weeks up to this event. Volatility will remain the key theme in the days to come.
Our conviction views on improving emerging market economic health, commodity prices have kept us moderately overweight EM risk across our strategies; we were positioned for those fundamentals whilst trying to avoid excess relative performance on the outcome of the US election. Across our local and blended portfolios we have added a short exposure to the Mexican peso and a long euro position in recent days, as well as selling Chilean peso and Turkish lira.