Last updated: 10:07 / Thursday, 10 November 2016
US Elections

Short-Term Market Volatility May Also Create Opportunities for Active Managers

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Short-Term Market Volatility May Also Create Opportunities for Active Managers

Donald Trump’s unexpected victory in the Nov. 8 US election rattled global financial markets, sending US Treasury and most European sovereign yields higher.  Initially U.S. stock futures and the dollar tumbled and havens such as gold and the Japanese yen were lifted, pairing movements after the President elect's speech however, investors eventually embraced the result of the election, buying stocks and selling bonds.

On Wednesday the Dow Jones, led by a rally in financial and health-care firms, rose 257 points while the US 10 year Treasury yield, a price reference for almost everything in the world, rose to 2.07%, its highest level since January.

Pioneer’s CEO and Group CIO, Giordano Lombardo, comments: "While the US election outcome is a surprise, it is by no means a "black swan" event. Markets had been strangely complacent leading up to the election, which was highly reminiscent of the pre-Brexit build-up." while Monica Defend, Head of Global Asset Allocation Research said they believe "Trump's policy agenda - although still unclear - may be bearish for income-related investments and could lead to a steeper yield curve."

Neuberger Berman notes that "A Trump administration is likely to be better for the traditional energy sector, and less damaging to the healthcare and financial sectors, than a Clinton Presidency. United government may also remove the partisan obstacles to meaningful infrastructure spending and corporate tax reform, particularly the issue of profit repatriation—although it’s useful to remember that Trump is far from popular among many traditional Republicans."

Chris Iggo, CIO Fixed Income, AXA Investment Managers believes that "in the end a stronger US is good for the world economy." He also believes that "if actions follow promises, and it is a big if, then the forces that have kept rates expectations down might work to revise them higher."Iggo points out similarities between the Trump election campaign and Brexit like the ineffectiveness of the polls, the similarities in the underlying economic anxieties and frustrations at the ineffectiveness of the “elite”, official institutions and big business which took for of bigotry and the fact that the outcome delivers uncertainty on the economic outlook. "However, the big differences are that with Brexit, the outcome of the referendum created the prospect of a huge negative shock for the UK economy, while Trump’s win means a potential economic boom to the US. Secondly, the UK has largely lost control of its economic destiny for the time being while, assuming Trump has a modicum of support in Congress, the new President will be very much in control. He may not have an overwhelming popular mandate, but the Republican Party, of which he is now the leader, is in control of all parts of government."

According to Ian Heslop, Head of Global Equities at Old Mutual, and Manager of  the Old Mutual North American Equity Fund: "Looking further ahead, several of Trump’s policies, for example his protectionism, his desire to scrap existing international trade deals, and to deport illegal immigrants, have the potential to contribute to longer-term market volatility; but others, for example his plans to slash taxes, including reducing the business rate from 35% to 15%, his plans to encourage repatriation of corporate profits held offshore, and to embark on massive infrastructure spending, could stimulate the US economy, lifting equities. Much is uncertain, not least because his campaign promises have been long on rhetoric and short on policy detail."

EM selection – a lesson for Trump survival

According to Legg Mason, EMs were one of the most hit sectors following Trump’s victory, as his well-known protectionist views could hinder EM exports to the world’s largest economy. The Mexican peso was again the proxy for the inversely correlated Trump-EM trade, plunging to historic lows. Other export-dependent currencies, such as the South African rand and the Colombian peso, also fell. Despite this pessimism, some EM local bonds and currencies rose, a sign of how investors are increasingly differentiating within the asset class, which once traded almost as a bloc. Yields of India’s local bonds, for instance, fell, given the country’s lower ties with the US and on the back of its more domestically-focused economy. The Indian rupee was one of the few currencies to rise against the greenback. Eastern European local sovereign bond yields also fell, as the region is more dependent on Europe than on the US.

 

While the Mexican peso plunged 13% to lifetime lows, officials held back from taking action to support the currency and will not make a monetary decision until their meeting next week.

From a Mexican Equity point of view, Barclays recommends investors to not overreact. While the MXN has weakened, the Mexican Equity market is indicated to be down by about 1-2% in local currency terms. They believe that many of Trump's reforms would likely encounter opposition in Congress and are likely to require compromises. In their view, mexican sectors that are likely to underperform are manufacturing, industrial real estate and low-end consumption. To the opposite they believe large cap financials, large cap consumer stocks (mainly staples), telecom and infrastructure stocks are likely to outperform on a relative basis to the Mexican benchmark index.

While uncertainty has increased in the wake of Trump’s victory, financial markets ultimately tend to reflect long-term fundamentals. However, the short-term market volatility may also create positive buying or selling opportunities for active managers.

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