9 November 2016
9 November 2016
The Global Multi-Asset Income strategy aims to deliver a defensive return profile. As a consequence, the strategy tends to be risk averse, with a strong focus on downside risk management. Strategically, our portfolios have a modest growth asset bias with a lower than normal interest rate risk, within the constraints of a conservative overall targeted level of risk. Clearly, this bias was seen as more likely to do well following a Clinton win.
In response to narrowing polls, we added a small number of tactical hedges on top of our strategic positioning to reduce risk modestly ahead of the election and provide downside risk protection in the event of a Trump presidency. These hedges included a sale of equity futures, reducing our net equity exposure; and short positions (benefiting from a fall in value) in a basket of vulnerable Asian currencies. As we moved closer to election day, the risk of Trump winning rose. Subsequently, we increased these hedges, this included selling additional equity futures (reducing our net equity exposure further), adding interest rate risk through US Treasury futures, and buying a small amount of Japanese yen and Swiss francs in addition to closing our modest Canadian dollar exposure. Overall, these hedges had the effect of taking down our expected risk, estimated by our risk systems, by about a quarter. We chose to do no more, as we had done ahead of Brexit, because a victory for Trump still remained an outside risk, rather than closer to 50/50, as the Brexit polls had been.
Our view is that there are parallels between Trump and Brexit, with a likely initial shock being followed by a more mixed reaction, as it is still unclear what president Trump might actually implement and how much support Congress will have for his plans. As such, our plan is to use the current market weakness to reduce our hedges ideally at good levels and move back to our underlying strategic exposure.
9 November 2016
As the outcome of the US presidential election was announced we might have expected a degree of short-term volatility in reaction to what was broadly believed to be the less favourable outcome for the financial markets.
In the lead-up to the election the 4Factor team worked closely with our Investment Risk team to conduct stress tests of our portfolios, based on a variety of potential market impacts. However, the equity market reaction has so far been relatively muted after the initial shock. Bond and foreign exchange markets have seen a more notable reaction with an expectation that a fiscal stimulus could lead to inflation and, as ever in markets, the material moves are in stocks, sectors or currencies that are likely to be directly impacted. The Mexican peso remains the most notable in this category.
Some of the potential longer term US implications of the Trump administration may include:
The 4Factor Equity process focuses on the bottom-up analysis, confident in company fundamentals being the more reliable long-term drivers of stock prices. Our approach will be to follow our process: to understand if and where investment cases have been fundamentally impacted and where, therefore, it is advisable to sell, but also to search out new opportunities created in the market.
9 November 2016
Donald Trump's victory in the US Presidential election has impacted global markets as investors begin to digest what a Trump victory actually means. His protectionist instincts could well have significant implications for free trade, economic growth and company earnings. At the very least, extreme campaign rhetoric and policies lacking in both clarity and detail will no doubt continue to unnerve equity markets, leading to prolonged uncertainty and volatility.
We did not make any material portfolio changes in the lead-up to the election given our long-term, bottom-up Quality focus, and do not expect to make any material changes now that the result is known. Our Quality investment approach focuses on seeking cash generative companies able to sustain high returns on invested capital, with typically low sensitivity to the economic and market cycle. The performance signature of the global Quality portfolios has historically been one of participating meaningfully in up markets, with smaller drawdowns in down markets, with lower-than-average volatility. We believe the historic defensive growth characteristics and resilience of the companies we invest in will position them relatively well through the volatile market conditions we are likely to see.
Donald played his “Trump” card yesterday as the proletariat voted against the bourgeoisie, continuing from where the UK Brexit vote began in June in shaking societal socio-economic changes. Beyond the initial shock event, market participants need to consider key investment considerations. Longer term, the course of action could lead us down a de-globalisation path with increased possibility of stagflation as marginalised workers are appeased by regulation, and policies adjust to an anaemic growth environment.
In the short term, the initial trades are typical to take risk off, and are probably wrong. Flocking to treasuries, gold and defensive assets only makes sense if the cycle continues to be deflationary. We would not chase these trades. Brexit was a buying, not a selling opportunity for Quality businesses.
The four US policy actions to look out for are:
Our local portfolios are positioned for a modest improvement in the local interest rate cycle, reflecting room for both long term and short term interest rates to fall, and this continues to be our view. We caution against chasing the safety of cash over any time horizon. Cash-generative equities will continue to be a better opportunity. We will look to add here if market volatility persists.
9 November 2016
We believe that investments in the natural resources sector continue to offer attractive diversification in the current environment. While we do expect short-term volatility in commodity prices driven by associated moves in the US dollar and equity markets, we don’t believe the result in the US election will be a key driver in the forecast of medium-term commodity prices. As a safe-haven asset, gold is perhaps the exception as we expect to see continued volatility post-election. Gold is typically well supported when uncertainty grows around the outcome of an event, as was seen in the unexpected outcome of the UK’s ‘Brexit’ vote. However, the ultimate driver of the gold price is the outlook for global interest rates and inflation with the US Federal Reserve’s (Fed) rate cycle a main determinant. At a company level, we continue to focus on companies with improving profitability which can grow shareholder value through the commodity cycle.
Given the lack of clarity on Donald Trump’s policy framework, uncertainty and volatility will define the immediate market reaction. Gold will continue to be the main beneficiary in this environment and this volatility could also affect the Fed’s December rate hike decision. US mining and the oil and gas sector should be more resilient than others given Trump’s protectionist stance towards the US heavy industry. Furthermore, broad commodity prices could see support from a weakening dollar. However, renewable energy companies, in the US and globally, could suffer given Trump’s position on climate change and the lack of support for renewable energy.
9 November 2016
There are very real cross-winds at play at the moment and we are watching developments closely. For fixed income specifically, there is every chance that the “fiscal policy taking over the baton from monetary policy” narrative gathers momentum as the Republicans now hold the presidency, Congress and Senate. The prospect of political deadlock has decreased, and we believe that traditional conservative policies such as tax cuts could very well follow. This expansion would pressure longer-dated US bonds, and provide a negative impulse for longer-dated bonds across the globe. Further, the economic uncertainty this type of political upset creates could very well delay the Fed from hiking in December, providing support for shorter-dated bonds. We have generally positioned our portfolios conservatively for some months given the significant local and offshore political risks - and this likely bond “bear steepening” does not come as a surprise.
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