How were the markets initially affected by the US Presidential result?
As we know, markets do not like uncertainty. A Trump victory was expected to rattle markets all over the world. It was anticipated that there would be a rally for the safe haven assets of gold and Treasuries and a selloff in equity markets. When the news of the result began to break during Asian trading hours, the Us S&P 500 Future suspend trading as it hit the maximum move allowed by the exchange of -5%. Similarly, the FTSE looked like it would open 4% down. By the end of the day, most equity markets had surprisingly closed up.
How are inflation rates expected to be affected?
Trump’s speech only mentioned boosted infrastructure spending. This, given full employment in the US, may add to inflationary pressures. Bond yields have risen significantly since the election. Whilst interest rates are only likely to rise slowly, the increased supply of bonds is expected to drive yields higher. We continue to prefer inflation linked Treasuries in US dollar portfolios because we believe the expected rate of inflation remain too low.
Were there any markets that performed well in the light of Trump’s victory?
It is worth noting that there was dispersion among stocks and sectors in the market reaction to his victory. Banks’ stocks rallied due to Trump’s plan to reduce regulation and rising bond yields which should boost profitability. Pharmaceuticals also performed well as Clinton was vocal in her drug price denunciation. However ‘bond proxies’ such as utilities and food and beverage stocks sold off due to higher bond yields.
What is your view on the current status of the US dollar and the pound?
The US dollar has strengthened following Trump’s victory, most notably against emerging market trading partners such as Mexico. The outlook for the US dollar will be determined by the president-elect’s trade policies and so we remain neutral on the currency at this time.
Sterling weakened significantly on the Brexit vote. Following the initial fall, the outlook for Sterling is now more balanced. In the short run, following Trump’s victory, it gained safe haven status and saw gains but we expect that this will subside. Its future path is likely to be a function of the Brexit negotiations. This outcome could be binary as a quick resolution could lead to a sudden sharp appreciation in the currency and vice versa. The political events in Europe are largely priced into the euro but we believe there remains potential for moves either way depending on results.
How are Government Bonds being affected?
The BoE action had driven Gilt yields lower but with the global selloff in bonds post Trump’s victory, yields have risen. A shift towards fiscal stimulus seems likely and this will add to inflationary pressures. This is further supported by a rise in populism globally. The BoE has indicated that they are prepared to see inflation rise in the short term in order to ensure longer term economic prosperity. We expect rates to stay lower for longer and this, along with rising inflation, should continue to support Index Linked Gilts but we have preference for shorter maturities.
Which are currently more attractive, Inflation linked bonds or Treasuries?
We expect the US to hike rates in December and gradually thereafter. US domestic economic conditions appear to indicate that an increase in interest rates is justified. We remain biased to inflation linked as opposed to conventional Treasuries. Potential inflation pressures from a Trump presidency only support this. German bond yields are negative out to seven year maturities and we see less value here.
How is the high yield credit market responding to the low oil price?
There have been a limited number of defaults and some corporate restructuring has also occurred. The oil price continues to impact the market as a whole with some spread widening on weaker oil prices. The fundamentals of the European market remain better due to the smaller commodity exposure and therefore the yields offered are relatively modest, which is not surprising given the negative government bond yields. Low liquidity in this market is an ongoing concern and therefore we suggest selective exposure.
Is this the beginning of a trend against Globalisation?
We recognise the trend against globalisation has picked up. The trend is mostly notable with the UK voting to leave the EU and the election of Donald Trump. However, the debt dynamics in emerging markets have improved as they are less reliant on external debt. Opportunities exist within this diverse part of the credit market but specialist knowledge is required.
What are your current views of Europe and US equity?
We do see some attractiveness in European equity due to it being under-owned and relatively cheap. However, Europe still feels like an area with strong headwinds, principally due to geopolitical risk. These political events include the referendum in Italy next month and elections in France, Netherlands and Germany next year. Beyond this, there is a banking sector that remains overextended and negative interest rates call into question the profitability of banks. Most activity indicators for the region do not suggest swift recovery.
We continue to believe the US is home to the largest number of high-quality companies in the world and our preference for this is reflected in our positive stance. In the current low-growth environment, companies that can compound growth over the long term remain highly attractive. External factors, such as US dollar strength, cannot be avoided. In light of Trump’s election and a Republican control of Congress, our preference now shifts specifically to small and mid-cap companies with a domestic focus.
Is diversification preferred?
Our preference remains for long/short and event driven funds due to the increased dispersion of returns and rising takeover activity in this low interest rate environment. In balanced portfolios trend following strategies have diversification benefits and have tended in the past to do well when equity markets fall. Gold remains a useful diversifier also given its protective nature during recent risk-off periods.
And finally, how do you believe the UK property market is holding up?
UK Property funds, particularly those that are London focused, were hit hard by the Brexit vote. Some funds closed for redemptions, others applied steep discounts. However, the discounts applied have been reduced and there is a trend towards reopening among those which closed in the aftermath of Brexit. Generally, the property market seems to be holding up better than expected. With bond yields low, yielding assets like infrastructure appear highly desirable and we retain our positive stance here.
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