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Sunday, November 13, 2016

A week on from Trumpageddon...

A week on from last week's momentous US election, and some things, at least, seem a little clearer:

(1) U.S. growth agenda - A major cornerstone of the Trump presidency will be one based on reducing corporate taxes and increasing infrastructure spending. This seems likely to benefit the U.S. stockmarket, particularly those companies that have exposure to construction and infrastructure. The likely corporate tax cut (see (2) below) will also boost earnings for US companies overall, thereby making the U.S. stockmarket look better value than it did before the election. However, the shift in focus has been notable: whilst the DJIA was up 2.8% in the last 3 days of last week, the more externally focused S&P500 was largely unchanged. More notably, the Russell 2000 small cap index surged by 4.1% over the same period.
(2) U.S Tax cuts - A likely reduction in U.S. corporate taxes and some sort of amnesty for companies repatriating offshore cash seems likely to be high on the agenda. Whilst the numbers are still (like so much of the Trump platform) subject to discussion, lower taxes for corporations will help boost earnings. It would make sense if some incentives were also given to encourage companies to invest that money productively in the US, but that - although logical - is just pure speculation. In any event, expect that US corporate buybacks will be back on the agenda. Again this would be (U.S.) market positive.
(3) More debt - Now that the Republicans control both arms of the legislative branch (the Presidency and Congress), the Trump infrastructure plan and tax cuts will need to be funded by more debt on a short term basis at least. That implies that Republican resistance to further increases in the debt ceiling will - like so much else - be put on hold for the time being. More debt means higher yields as a result of increased supply, and on a short -term basis, that's bad news for fixed income investors as the yield curve shifts upwards. The odds of a December rate increase from the Fed has now risen above 80%.
(4) Restructuring of trade - Although the US will depend on "the kindness of strangers" to finance its shiny new debt issues, the biggest investors for such debt have traditionally been the same Asian governments that seem likely to be targeted by trade restrictions - most notably the Chinese (and to a lesser extent, the Japanese, Koreans and Taiwanese). How those two conflicting objectives will be balanced remains to be seen, with an early indication of direction being who Trump chooses to tap for the post of Treasury Secretary (a trade and debt pragmatist or a pure trade hawk). In any event, a less accommodating trade agenda for the US will be bad news for Asian and Emerging Markets, many of which have seen their currencies drop sharply in the last few trading days (led by Mexico, and also Malaysia, India and Indonesia). In any event expect more bilateral trade deals in the future and no multi-lateral ones (even if in practice, that's what's been happening for the last few years anyway, as illustrated by the stalling of WTO talks over the last 2-3 years).
(5) Nationalism - The rise of nationalism as seen by both Brexit and now the U.S. election is a reflection of widespread dissatisfaction among a large chunk of the electorate. These two victories will give further impetus to further shakes of the status quo, particularly in Europe which faces a number of key votes in Italy, France and Germany over the coming months. Few would now bet on the outcome. In any event, the outlook for the EU and the Eurozone is far less stable, and such uncertainty could result in companies delaying investment plans for some while.
(6) Commodities - An "America First" growth agenda seems likely to focus on commodity self-sufficiency, particularly oil as the "drill, baby drill" brigade is given access to more Federal land for prospecting purposes. Although the impact on global supply will not be felt for some time, it seems clear that this will cap oil prices for some time to come, unless OPEC and others finally agree some meaningful production cuts (the recent precedents for such an agreement is not exactly encouraging).

Where does that leave investment portfolios?

Increasing domestically focused US equity exposure is logical, in an "America First" environment, at the expense of pretty much all other markets geographically, so that means an overweight in the US equity market and an underweight everywhere else.

On the fixed income side, a Fed rate increase in December is largely baked into the price, with UST yields having jumped to over 2% from 1.82% pre-election (and a low of 1.56% in June). Short-term, it looks as though further yield increases may be more limited, but that will depend on the data going forward. A big increase in government spending seems likely to be inflationary, so the Fed will be watching that closely in 2017. Pre-election, the expectation was for at least two rate increases next year... this seems likely to be accelerated and if so, would see further falls in bond prices. To that end, we continue to focus on short maturity bonds only, since the rate increases will have a bigger negative effect on longer dated bonds.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 6
5577186
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.



Wednesday, November 9, 2016

So.. that's that.."Orange Is The New Black"

So... for the second time this year, pre-vote polls have proved gloriously wrong, and the underdog campaign has scored an unexpected and stunning victory.

We now have to look at what this means for markets, which in the case of the Trump campaign is difficult to do because of a lack of any real detail (they have produced a 10th of the policy documents that the Clinton campaign had done).

On that basis, uncertainty reigns, and stock markets in Asia or futures in Europe and the US are sharply down. Gold is up, the yen has bounced, the USD has fallen back and the Mexican Peso has plummeted (by 9% so far).

We have little to go on as regards future policy direction, and suspect that the Trump campaign is probably as surprised as everyone else about their shock victory. On that basis, it will take some time to work out how they approach the transition and the first deck of key appointments most notably that of the Treasury Secretary and the economic team.

A Trump economic platform seems likely to focus on tax cuts, sharp increases in infrastructure spending, reduced regulation across many industries (starting with the likely repeal of Obamacare). These supply side measures, could, with a squint, be described as being market friendly (especially for the banks, consumer discretionary, industrials, construction companies, some of the insurers etc.). Similarly, after an initial sell off, the USD might begin to rise, particularly if a Trump administration gives and amnesty to US companies who repatriate cash reserves held overseas.

Whether or not these positives are enough to offset the countervailing negatives (more restrictive trade and immigration policies and the necessary increases in debt to pay for it all), will remain to be seen. Certainly, the implications for the more trade focused countries in Asian and other Emerging Markets look very uncertain. Both TPP and NAFTA now look to be either dead in the water or likely for repeal. A trade war with China could be possible, particularly  if China is labelled as a currency manipulator (one which holds large chunks of US government debt). This may be just part of a negotiating tactic, but if so, its one that would carry big risks of a mis-step.

Overall, though, as we saw post the UK's Brexit referendum, the initial market reaction could well be overdone (although as I write, I note that the US futures, having been down over 5% at one point earlier today, are now down by 2.6%). This could give rise to a buying opportunity, at least in the short-term.

Longer-term, the future is obviously more clouded than it would have been following a vote for the status quo under Hillary Clinton. For instance, it seems likely that the Federal Reserve will see a greater degree of political scrutiny and pressure than it has been used to (and we have to assume that Janet Yellen will not be renominated once her current term expires on January 31st 2018). Trump has certainly been vocal enough in his criticism of Fed policy to assume that his Treasury Secretary will be more combative and more restrictive in terms of how he/she works with the Fed to interpret its mandate. This might only become an issue in a crisis, but it will certainly mean that if that happens, the Fed will have much less flexibility than it had in 2008/9 (to be fair, the changes in legislation since 2009 would make such things more difficult anyway). Whether or not we are on the brink of a global recession as suggested by Paul Krugman in a slightly hysterical very early morning NYT op-ed piece is perhaps a bit a stretch (http://www.nytimes.com/interactive/projects/cp/opinion/election-night-2016).

In any event, the next few weeks will be interesting to say the least... will President-Elect Trump pivot to the centre and build a good team of sane technocrats, or will he concentrate all decision making in his own hands and continue with the erratic approach we often saw in the campaign? We can only hope for the former: a change of political tone across the spectrum after such an extraordinarily divisive campaign - on all sides - would be a good start.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 6
5577186
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.