We are having to become used to surprise election results and there may yet be more to come with elections next year in both France and Germany as well as referendums on EU related matters in Italy and possibly the Netherlands.
Despite the fact that markets were taken by surprise, again, the initial reactions were generally more muted and at the time of writing virtually all major global stock markets have responded positively.
Yesterday morning Michael Hughes led a conference call with our Investment Committee to consider the likely economic implications and those for our portfolios. The key points that Michael identified were:
- The Trump victory is further and greater evidence that electorates are dissatisfied with the ruling elite that have monopolised power for many years. Those who feel they have been ignored now want their voices and their issues heard and acted on. It is a kick-back against globalisation.
- This trend is bad news for Europe, the elections and referenda to come and for the issue of European integration as well as the Single Market.
- President Elect Trump’s economic policies are, based on his statements to date, broadly positive in that he has referred to sharp cuts in corporation and income tax as well as spending on infrastructure. The tax cuts are intended in part to encourage the repatriation of foreign profits back to the United States, that money would then be available to fund the infrastructure spending plans which in turn would boost US economic growth.
- This feeds into the already identified turning point whereby a fiscal policy (the tax cuts and infrastructure spending referred to above) will replace the previous monetary policies (characterised by low interest rates and quantitive easing). This is a negative scenario for Bonds, where we are already aggressively underweight, and reinforces the change we have identified which is the value of holding real rather than financial assets.
- The demand for industrial commodities is likely to rise and as a result we will be reviewing our current global emerging markets exposure so that moving forward it is focussed on those commodities that are commodity producers rather than commodity importers.
- In relation to equities generally we expect cyclical stocks to outperform what are now expensive defensive stocks and we will be reviewing funds with that in mind.
- In the United States large caps are likely to do better than small caps although in overall terms we currently have limited exposure to US Equities in all our portfolios.
In our opinion there is no requirement for an immediate or rapid repositioning of the portfolios because they are already widely diversified and positioned to cope as well as possible with unseen events, such as this.
If anybody has any questions which this short note does not adequately cover, do contact us so that we may address any particular concerns that you have.
John Millican
Managing Director
