Trump for opportunities
Although we are approaching November cautiously and with hedging in place, our investment team maintains a positive outlook for global equities and a negative one for government bonds.
Before analysing the impact of a Trump win, let’s examine what both candidates have in common in terms of government policy actions. The single tangent point is expansionary fiscal policy and this is the main scenario on which we build our investment rationale.
Monetary stimulus passing the torch to expansionary fiscal policy will have actual impact on inflation with different consequences on equities, rates, and the dollar.
The opportunities we see include:
- Buy financials: Despite the anti-Wall Street rhetoric from both candidates (especially Clinton) implying that they will increase the sector’s regulatory burden and close loopholes, it’s clear that a steepening US yield curve supported by rising interest rates and benign inflation should provide an environment in which banks and financials in general will likely outperform.
- Buy infrastructure, basic materials (non-precious metals) and engineering stocks: The fiscal spending commitment and the need for infrastructure projects set the stage for stock appreciation in the various sub-sectors. The correlation between deb/gdp and equities (industrials in particular) is pretty high. An infrastructure play should appeal to voters and investors from both political parties.
- Buy treasury inflation protected securities: Expansionary fiscal policy will eventually lead to higher inflation. In such a scenario, exposure to linkers gives investors a better alternative than gold (correlation above 50%), since they can ride an asset class with positive carry.
- Buy US dollar on weakness: Both candidates will support and strengthen corporate America. It is the protectionist or free trade tone from the new president that will have the most impact on the US dollar. As with sterling in the Brexit scenario, the dollar under a Trump presidency may end up reflecting more than macroeconomic fundamentals. Our view is that a growing economy within a rising rates environment should provide support to the dollar.
- Sell US Treasuries: Again, fiscal policy and rising rates should be the reference point. Also, long term sustainability at current long term yields is definitely questionable for insurance companies, pension funds, and endowments.
We regard a Trump victory as a significant possibility and are prepared for the investment opportunities it would create. A win for Trump would challenge conventional wisdom and be a shock to many investors, creating market volatility. Moreover, cross-asset volatility and a flight to quality in the short term would readjust asset valuations. The endurance of investors’ confidence in financial markets and perhaps their faith in capitalism will be tested. We remain confident however, that corporate America will survive even in a more protectionist environment and this should provide optimism for risky assets.
As ever, in change lies opportunity.
Vassilis Papaioannou is CIO at Dolfin