11 Nov All Trump but very little Fanfare
2016 will undoubtedly be remembered for being a year of surprises, and perhaps none more so than Donald Trump’s march to the White House.
Once again, as witnessed with the General Election in the UK and the Brexit vote, the most striking feature is perhaps how the opinion polls could be so hopelessly ineffective. Whilst financial markets had priced in a Clinton victory, as we saw post-Brexit, markets made a rapid readjustment at the unexpected result, but appear to have regained their poise and brushed off any concerns. At the time of writing the UK All Share index is broadly flat since the result, undoubtedly soothed by Trump’s more measured and conciliatory tone, post-result.
The reaction in Bond prices has been more surprising. As readers will know, Government Bond (gilt) prices tend to benefit in times of uncertainty and when this happens the price goes up and the yield falls. In the immediate aftermath of the election result, there was a brief flurry towards gilts but this now appears to have reversed. We have argued for some time now that gilts have been showing all the signs of a ‘bubble’, with the yield falling as low as 0.5% on a 10 year bond as recently as August. Since then the yield has spiked to 1.34%, an uplift of 150% since August, and a corresponding price reduction of around 10%.
So how do we make sense of this ?
The answer is, as with Brexit, it is probably too early to tell. Despite Trump never having held a public office, Republican governments do tend to be regarded as economically and financially ‘friendly’. Indeed Trump, despite all the ill-advised rhetoric during the campaign, has been clear that he favours expansionary policies such as deep tax cuts and infrastructure-spend.
There is no denying that his appeal to the electorate is that of a political subversive or agitator, along with his desire to ‘Make America Great Again’ but his ability to deliver could be compromised if he seen to be too bombastic. Moreover his own business interests create enormous scope for ‘conflict of interest’ which will need to be managed if they are not to present a barrier.
So can we all breathe a sigh of relief ?
Not quite. Putting aside the US Presidential election there remain uncertainties, most notably huge levels of worldwide debt, the mechanics of Britain’s exit from Europe and with Europe in mind, elections in Italy, Germany and France over the coming 18 months. The question is whether ‘anti-establishment’ politics start to gain traction across Europe.
We have made no material changes to our asset allocation, being underweight bonds (for reasons stated above) and overweight equity, which we believe acts as an ‘insurance policy’ against any short term pick-up in inflation. Whilst on the subject of asset allocation we can confirm that trading on both property funds within CDC portfolios has been reinstated and here, the long term attraction of property remains undiminished and whilst we would probably stop short of adding to our positions, we see merit in running our long held overweight position.
As ever if you have any questions about the content of this bulletin, or your portfolio generally, please feel free to ask your adviser.