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What Trump at the helm

means for portfolio construction

author image

Alwyn van der Merwe

Director of Investments

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Nowhere has this quote by American author Mark Twain rung more true than with the US presidential election earlier this week. Political commentators, investors and pollsters were dead certain that Donald Trump would never be the next president of the United States. They were dead wrong. Investors who favour basing their portfolio construction on binary political outcomes like this one would do well to heed the lesson: they can only be right, or wrong – there is no in-between. And this week, the consensus was very wrong.


By Monday this week, forecasters were convinced that Hillary Clinton would win the election, and the S&P 500 rallied by 2.2%. On Tuesday – election day – besides the Nikkei suffering a drop and a slight pull-back in the S&P 500, markets didn’t do very much. After a weak opening on Wednesday when the election results were announced, there was more certainty and the S&P 500 went up by 1.1%. So all in all and despite predictions to the contrary, the equity markets globally were relatively calm.

The currency markets, on the other hand, were much more volatile and uncertain. We witnessed several knee-jerk reactions in these markets, including the movements of our own fragile currency, which went up and down by about 10% against the US dollar throughout the election process.

Amid this uncertainty, we believe the question investors should ask is:

What do we know about Donald Trump?

Trump’s campaign slogan was ‘Let’s make America great’ – an internal focus on the US which evidently resonated strongly with the voting public. In the run-up to the election, he was clear in his plans to stimulate the US economy from a fiscal perspective. In our view, over the long term, initiatives such as tax reform and increased infrastructure spending will indeed go a long way to generate growth in the US, which will of course have a positive impact on the markets.

However, his isolationist trade policies and protectionist views remain a cause for concern, especially for emerging markets such as South Africa. If Trump moves forward with policies reflecting his harshest protectionist rhetoric, it will present global macro-economic headwinds and could even lead to recession. It remains to be seen, however, to what extent his campaign rhetoric will translate into actual policy once he is faced with the realities of office. Governing is vastly different to campaigning, making such a worst-case outcome unlikely.

We should also remember that Trump is in the end a Republican, and markets, all things being equal, are likely to respond more favourably to the more market-friendly, less interventionist policy associated with Republicans. Trump is unpredictable and has never held public office, but he is first and foremost a businessman, so his presidency is likely to be friendly to business, even if only in the US.

Will Trump’s election have any impact on the US Federal Reserve’s anticipated interest rate hike at the end of the year? The President-elect has accused Fed chairperson Janet Yellen of keeping interest rates low for political reasons. In our view, as an independent agency, the Fed is not likely to take the Trump factor into account when they have to decide on interest rates early in December. They are likely to interpret economic data, which suggest that the labour market is looking sound, the economy is growing at a rate above 2% and there are certainly signs that inflation is starting to kick in.

What does this mean for investors in terms of portfolio construction?

History has shown that it is always unwise to position a portfolio around a binary outcome for a significant political event, which after all, is based primarily on guesswork. At SPW, we have always constructed our clients’ portfolios based on two factors: valuation and perspective. Macro-events such as the US election usually stir up market volatility which for investors focused on valuation leads to real opportunities to buy attractively priced assets and sell expensive ones. At SPW, we won’t hesitate to put our cash positions to work for our clients when we identify these opportunities.

In our portfolios, we are invested mainly in equities and property as these asset classes would ensure inflation-beating returns over the longer term. The fact that we will now have Donald Trump at the helm in the US does not change our view that these two asset classes will deliver on this promise. Over the short term, uncertainty may lead to investor sentiment weighing against equities and property. It is important to remember, however, that there was much more volatility and stronger market pull-backs after the Brexit vote in June. This suggests that portfolios were cautiously positioned before the US election, despite the fact that most people believed a Trump victory to be impossible.

Investors can also take reassurance from the fact that many of the South African companies we hold in our portfolios are global multinationals that generate much of their profits internationally. So while Trump’s election may have an impact on capital flows, it won’t have a huge influence on the companies we invest in.

A word on bonds – at the start of the year, we added to South African bonds as we thought they were cheap, and we still hold this view. We are underweight in international government bonds, however, as the yields remain low. We remain cautious of international bonds as an asset class.

Increased uncertainty and market volatility are likely to be part of our landscape for a while to come. It may be some time before the impact of the US election on the global economy in general, and emerging markets such as ours in particular, is revealed. Besides the possibility of a December rate hike by the Fed, the other macro-event likely to have an impact on markets is the Italian constitutional referendum scheduled for early December. We will of course communicate clearly with our clients in terms of our views of how these and other events unfold and their portfolio management implications.

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