Financial markets were “jolted” by Donald Trump’s election as the 45th president of the United States this week. Initially, there were violent reactions from both markets and currencies, some of which were later reversed, asset managers say.
They say you should expect more volatility in the short term. This may worry you if you are invested in offshore markets or in a South African unit trust fund with a significant exposure to offshore markets.
Events that shock the world, as the election of Trump has, often have severe short-term effects, but their long-term impact is often less severe, and astute fund managers will find investment opportunities in the months ahead.
Ian Beere, a financial adviser at Netto Invest and a former winner of the Financial Planner of the Year Award, says markets typically overreact to events such as Trump’s election and are likely to be volatile while the implications are digested.
Investment managers will wait for the Trump administration to clarify its policies before they adjust their portfolios, he says.
Beere says although short-term traders are active at times like these, your investments should be in companies whose long-term value is unlikely to change materially as a result of Trump’s election.
Ed Perks, the chief investment officer of Franklin Templeton Equity, says US equity markets will be volatile but resilient, as they were after the global financial crisis, previous political challenges in the US, such as tax reform, the Eurozone crisis and the Brexit vote in the United Kingdom.
Perks says that, over the past eight years, the underlying strength of the US economy, supported by positive factors in companies and for consumers, has been a key driver of value for investors in US equities.
“We believe the health of the US economy, in concert with corporate earnings and dividend growth, and consumer employment and spending trends, should be a significant factor for future market returns,’’ Perks says.
He says although it’s important to recognise that Trump’s trade agenda could change the way in which multi-national corporations grow their profits, it remains to be seen where the new administration will focus its efforts and how its policies will take shape.
Perks says sectors that are facing possible regulatory or policy changes, such as the healthcare sector, may be most affected by the Trump presidency.
Dan Kemp, the chief investment officer of Morningstar Investment Management Europe, says it is easy to build a case for bearish global financial markets, but investors should keep a level head and remain sceptical of this noise.
“We favour research over reaction and urge other investors to do the same,” he says.
Looking at the potential risks facing investment markets, Andrew Shard, the head of international research at Investec Wealth & Investment in the UK, says the key concerns are what will happen to US interest rates and global trade.
Trump threatened in his election campaign that he would replace the president of the Federal Reserve (Fed), Janet Yellen.
“The chances of the Fed putting up rates in December were 90 percent going into the election. But will the Fed hike if Trump’s election affects the economy negatively?” Shard says.
“If Yellen thinks it’s right for the economy, and that she might lose her job anyway, she might go ahead and push for a hike,” he says.
Trump has also said that he will pull the US out of the World Trade Organisation and the Trans Pacific Partnership, which would be bad news for global trade and hence for global growth, Shard says.
The outlook is more problematic for currencies (apart from the US dollar), including emerging-market currencies such as the rand, Shard says.
“This is because, relatively speaking, the US economy is doing better than the others, rates are going up, and the dollar is, after all, still the world’s reserve currency. Remember also that the US is less reliant on its export sector,” Shard says.
But the uncertainty over Trump’s policies could result in US companies holding off on capital expenditure and hiring. This could put pressure on company profits (earnings) when markets have been pricing in some improvement, he says.
Shard believes the US healthcare sector may be particularly exposed to any policy changes by the Trump administration. Cyclical shares, such as those of mining and financial services companies, could lose out as investors shift into more defensive share, such as beverages, until there is more policy certainty.
During his election campaign, Trump promised to spend US$500 billion on infrastructure over the next few years, which should mean more projects and more employment, and be could be good news for mining and construction firms.
Shard says US companies’ structural advantages over their foreign competitors give them the resilience to ride out political storms, as well as provide opportunities for global investors.
“US companies are entrepreneurial, dynamic and ambitious. They are flexible and take tough decisions quickly,” Shard says. “Seventeen of the world’s top 20 brands are US-based.
“US firms are at the forefront of the major technologies that are driving change, including robotics, health care, fintech, cloud computing and e-commerce. These are companies that can’t be found anywhere else.”
Asset managers do not have the same confidence in US bonds.
Dr Michael Hasenstab, the chief investment officer of Templeton Global Macro, says that, when there is a shock to the markets, assets in a market bubble or that are overpriced are the most vulnerable, and Templeton Global Macro has been saying for some time that US Treasuries appear to be overvalued.
He says the immediate implication if Trump implemented his proposal to increase tariffs on imported goods would be to exacerbate rising inflationary pressures.
Sanisha Packirisamy, an economist, and Herman van Papendorp, the head of asset allocation at Momentum, say they expect Trump’s election to have a short-term negative impact on the financial markets of emerging-market countries, such as those in Latin America, Asia and Africa.
Although many of Trump’s economic policies have not been clearly defined, those he has outlined suggest increased vulnerability for emerging markets, because anti-trade and anti-immigration policies could harm emerging-market economies that depend on trade with the US.
However, emerging markets investment guru Mark Mobius, the chairman of Templeton Emerging Markets Group, told the Wall Street Journal that pessimism about Trump’s victory is probably exaggerated.
He says the Trump’s policies could stimulate the US economy over the next four years, boosting other economies in the process.
However, he says uncertainty is likely to dominate global markets for months, causing swings in asset prices.