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Investment bankers are optimists by nature and so it didn’t take them long to decide that the election of president-to-be Donald Trump – which so few had predicted – will be a good thing for financial markets, once the immediate sell-off in equities and emerging currencies passes.
“Polls had suggested that Clinton was likely to win and markets expected that as well,” points out Bilal Hafeez, head of fixed income research EMEA at Nomura.
The first reaction to a Trump victory was strongly negative. S&P 500 futures were limit down 5% before US markets even opened; stock markets in Asia fell between 2% and 4%.
The Mexican peso at one stage tumbled 13.20% while the South African rand collapsed by 4.24%. Meanwhile, in the converse risk aversion trades, the Japanese yen surged by 3.83% and the Swiss franc was up 2.3%.
For Hafeez: “The big question now is how the Federal Reserve will react and the key factor there is how weak equity markets will be in the weeks ahead.”
Maybe not so weak after all?
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Mark Haefele, UBS |
“We had expected a Clinton victory and a Republican congress, so the status quo,” admits Mark Haefele, global chief investment officer at UBS.
“The big question now is what will Trump’s legislative agenda be and until there is clarity on that markets will be volatile. It’s a reminder that elections matter, but fundamentals matter more.”
The basic call at UBS, and across much of Wall Street, is now that fundamentals are sound, that profits can increase with a shot in the arm from fiscal expansion, tax cuts and higher inflation in the US.
In the medium term, that will be good for US equities though bad for US treasuries, which initially benefited from the flight-to-safety trade that also boosted gold and the yen.
UBS analysts remind investors that a Republican sweep has historically benefited US equities and they point out that infrastructure spending – which Trump has promised in spades and not just on the famous Mexican wall – could both be a short-term job-creating stimulus and a longer term boost to productivity.
They add that selected industries could also benefit from the possibility of more lenient regulation – particularly the financial services and energy sectors.
So that can only be a good thing.
Mads Pedersen, head of global asset allocation inside the CIO at UBS, describes today’s sell-offs as “more a correction than a panic”. While inflation now looks set to return to the US, domestic equities are the highest conviction call at UBS.
However, the impact on the rest of the world, and particularly on the carry trade in emerging market (EM) currencies, remains uncertain.
“For decades Asia has been a major beneficiary of the US bias towards free trade and open markets,” points out Min Lan Tan, head of the Apac investment office at UBS. The concern now is how quickly Trump’s hostility to established trade treaties becomes a focus of his legislative agenda.
China is protected by currency and capital account restrictions, but investors are likely to check the RMB/USD rate regularly for signs of any collapse in the Chinese currency that might presage a wider EM sell-off.
Asian equity markets are now likely to be subject to the volatility of their underlying currencies, which will in turn be driven by dependence on trade. So, look out in particular for the Australian dollar and South Korean won, but perhaps for gains in other higher yielding emerging currencies that sold off in the first hours after Trump’s win.
As Euromoney has previously analyzed, the world has probably passed the high-water mark for the value of trade as a percentage of global GDP.
Growing obstacles to free trade will make the world economy less efficient and more electoral shocks are possible in developed countries with far higher unemployment rates than the US and where large numbers of older, lower-skilled workers also feel left behind by the weak recovery that followed the global financial crisis. That means Europe.
Tim Stevenson, director of European equities at Henderson Global Investors, sees a long list of negatives for Europe.
“Trump is against globalization and open trade,” he says. “Europe thrives on free trade – as does the world, arguably. Trump may well use protectionism against many European companies.”
As to portfolio adjustments, Stevenson says: “It seems prudent to take a more conservative stance for the time being and raise a little more cash.
“We are reducing our banks weighting at the margin, as the probability of a December interest-rate hike is understandably reduced."
Longer term, of course, the big question for the Fed will be Trump’s efforts to replace Janet Yellen perhaps with a more hawkish chair and attendant volatility in the market’s pricing of monetary policy.
As markets search for signals, investors were already talking up the conciliatory tone of Trump’s victory speech and hoping that president Trump might turn out to be a less divisive figure than Trump the campaigner.
There might be another reason why the so-called shock of the outside candidate winning in a two-horse presidential race did not spill over into market meltdown today. It wasn’t actually that unexpected.
Investment bankers always claim to be wise after the event, but in the days before election day, Euromoney had plenty of conversations with market sources that were privately betting their own money on a Trump win.
The private polls of investment banks and hedge funds have taken on a near-mythological status since Brexit, but Euromoney spoke on the day before the election to one investment banking chief executive who was scornful of the official polls.
“Our own data suggests that Trump is in the lead now and that he has always been in the lead,” he says. “People need to open their eyes to the hunger for change. You could see the Democratic side cancelling rallies and hustling small crowds in front of the cameras, while supporters were queuing for hours to get into Trump events.”
This banker admits a Trump win was not fully priced in to the market, but counsels Euromoney not to be fooled by the rally that accompanied the FBI’s late decision not to proceed further in the investigation of Clinton or today’s falls.
“Sure, it will be risk-off in the immediate aftermath, and of course Trump may well be temperamental and volatile when criticized… but in the medium term, he could be positive for markets,” he says.
Euromoney asks if this banker has loaded up his personal account with construction stocks ahead of building the wall along the border with Mexico. He narrows his eyes, sensing that we might be poking fun. “The wall is just a metaphor, isn’t it?”
Euromoney looks forward to Trump explaining that to his supporters.
