Politics, portfolios and an unexpected presidency
It has been an incredible year of political change; Brexit, Trump and now the Italian referendum have been unexpected curve balls that are shaping this year’s financial landscape.
One key conclusion from these events is to expect the unexpected and with more major European elections on the cards in 2017, the trend of change could be set to continue. Should right-wing leader Marine Le Pen from the National Front win the French Presidential election in May, it could spell the end of the entire European Union.
Steve Ross, Investment Adviser at James Sharp explains the company’s views on the current political climate: “It's always sensible to remain cautious about global events, rather than jumping to any hasty conclusions. We try to focus on companies more than politics, as we think in the long run that counts for more. However, political developments can have an impact in the short term and will often create investing opportunities for clients to develop their portfolios.
“Whatever 2017 has to offer, markets will continue to fluctuate and opportunities are likely to be presented.”
Why has Trump affected sentiment so much?
Trump will not take office until the 20th January 2017, yet world financial markets have already priced in incredible assumptions about what affect he may have. Cyclical shares such as those in the commodities and banking sectors have rallied, Government debt (Gilts and Treasury bonds) and corporate bonds have fallen in value, whilst equities have benefited as investors rotated from one asset class to another.
All of this is on the belief that Trump equals inflation, rising interest rates and the distant dream of economic prosperity. Much of this is premature, and has more than a whiff of a short-term knee jerk reaction to the election result.
After a rigorous election campaign to ‘Make America Great Again’, Trump is promising significant changes, including withdrawing from the Trans-Pacific Partnership on his first day in office.
This is likely to produce significant frictions for the global economy and while it may be perceived a positive step for USA manufacturing, trade tariffs and are likely to generate lower corporate profits and job losses.
Other pre-election policies such as abolishing Obamacare and building a wall on the US border with Mexico have been toned down somewhat and perhaps more reigning in of campaign rhetoric will be an early theme of the Trump tenure.
With a background in real estate, Trump has a history of borrowing and building, so it’s hardly surprising that he has proposed a $550 billion boost to infrastructure spending in order to raise the US growth rate from 2.5% to 3.5% a year. He also has plans to cut taxes both for individuals and companies and only time will tell what impact this could have on both inflation and interest rates.
For now, the ‘Trump effect’ has been broadly positive for equities but not so good for corporate bonds and Government debt. Having a balanced portfolio of quality equities, fixed income, alternative assets classes and a little cash aside is likely to remain the way forward to meet the challenges of an uncertain world.