23 November 2016
We awoke this morning to news that Donald Trump will be the 45th President of the United States, with the country choosing not to elect its first female leader.
For us in the UK, there is a clear sense of Deja vu with June’s Brexit vote, which pollsters also called wrong, and Trump’s election could prove potentially even more divisive. While the result does come as a shock, investors are coming to expect the unexpected in 2016 and we await Italy’s imminent Referendum with interest.
Mirroring the Brexit experience, this looks to be another anti-establishment vote and we saw Trump happy to jump on that bandwagon throughout his campaigning. As many have said, recent months have shown some fairly low politics, with both Trump and Clinton largely focusing on personality rather than policy.
While we await the President-Elect inauguration in January, we will face uncertainty in the short-term as Trump’s policies are far from clear. This might stall the Federal Reserve from any further rate rises this year and there have been suggestions chair Janet Yellen may tender her resignation. What is clear is that this result is a further sign of increasing anti-globalisation sentiment around the world: we know Trump wants to take a firm stand on foreign trade and any rise in protectionism will clearly have an impact on global growth.
Elsewhere, there is rising expectation of fiscal stimulus to boost the US economy but it is important to remember there are checks and balances in place – in the shape of Congress – for any policy decisions. The Republicans have a majority in Congress, which should mean Trump can work better with the House than Obama, in theory at least.
In terms of our portfolios, we did not feel it necessary to "Trump proof" ahead of the election as we already felt US equities are expensive. The early market reaction was reminiscent of 24 June post Brexit but the lesson we took from that was not to read too much into the immediate short-term response to a political event. Brexit panic represented a great opportunity for bargain hunters among the active management community and I suspect this may happen again.
For now, we continue to reiterate our long-term philosophy and approach: we run target risk portfolios and focus on the long term, with fundamental valuation driving our tactical asset allocation. We have had cash in the portfolios for a while and will look for any bargains as the dust settles.
Multi-decade returns have shown that, whichever political party in ultimately in power in the US, the economy and stock market tend to carry on regardless. Certain sectors will tend to benefit more than others depending on the backdrop however, which – over the long term – strengthens the case for active managers.