The US presidential election was Hillary’s to lose. She was the wrong candidate to put against someone like Trump and thus the Democrats deserve defeat for this fatal choice. The global establishment and their mainstream media got this one wrong, again, ignoring the real popular vote and over-intellectualising the process. No lessons learnt from Brexit here.
I am afraid that we will be confronted with more outcomes like this in Europe soon. Denouncing people as stupid because they vote for a certain candidate is not helpful but unfortunately this is still the dominating attitude amongst the European and US political and economic elite living in their own bubble. Hence, they have been unable to recognise the sea change in front of their eyes.
A comparison to Weimar Republic Germany is a bit far-fetched but not very far off in the sense that we have to get used to deal with protest votes, protest of people who feel disenfranchised and poorer, struggling to make progress in their lives. This is evident for the majority of the middle classes in the developed world, sitting between a rock and a hard place having to shoulder the burdens of unsustainable government finances and seeing their disposable incomes being under pressure for a long time. A very slow and uneven recovery after the GFC has led to great mass dissatisfaction that is now being reflected in a changing political landscape.
Overall, I believe Trump will be less dramatic and dangerous as a president and likely be a good manager in his new role, using advisors effectively and probably getting more things done than people expect at the moment. In stock market terms, the bar is set very low for him in terms of expectations and it should be easy to exceed them. The Congress being Republican will only help in this matter and if there is resistance, Trump will bulldoze his way through the system.
How were we positioned?
I have always maintained that Trump has a more than fair chance of winning this election. The consequence of this would be volatile markets and certain assets that would sell off immediately as markets were not positioned for this outcome.
1. Hence, we continued to keep our large healthcare allocation in equities, based on inexpensive valuations and overly discounted share prices that were implying a Clinton victory.
2. We raised substantial cash over the past weeks in the portfolios to about 15-20%, selling lower-rated corporate bonds and reducing Japanese exposure
3. We put in place a put spread position equivalent of a 30% hedge across the portfolios hedging for a ~10% drop in the S&P500
4. We have almost no emerging market exposure at this point simply because of valuations and the earnings outlook
5. We have a substantial allocation to US financials which benefit from a rising yield curve and a strong US economy, both of which is likely under a Trump presidency
What to do now?
I continue to believe that Trump will be a net positive for markets and the US economy and this is important considering that US markets lead most other developed world markets.
1. The rate outlook is likely to change in the sense that it becomes now more unlikely that the Fed will raise in December. This is because markets are more volatile and uncertainties have increased but also because Yellen is likely to be replaced as Fed Chair. In addition, next year’s FOMC composition will be amongst the most dovish in history. This will be positive in the sense of low rates for longer. In the medium-term, Trump’s policies could prove to be more fiscally expansive and inflationary so we would expect somewhat rising rates on the long end which is already evident in the US long bond (30-years) compared to the 10 year.
2. We will close our hedge positions today, taking profits on the basis that volatility is likely to spike and markets are near their trough levels for the time being. Good time to fade fear here.
3. We are looking to increase certain equity positions, likely via liquid US ETFs, as the market returns to normal and investors begin to price in a better economic outlook for the US.
4. As a trade, we are looking to buy Mexican local government bonds at depressed levels in terms of currency and bond prices. The logic is that while the Mexican economy is reasonably strong, the impact of Trump on US/Mexican relations is unlikely to be as bad as expected from some of his rather dramatic statements.
5. We are looking to buy autocallable notes on a combination of indices, subject to pricing as current markets should offer attractive yields in these products.
These are my preliminary thoughts and we will update you if and when we implement positions.
Please let me know if you have any questions.
Best regards,
Marco
Marco Pabst, CFA
Partner, Chief Investment Officer
ACPI Investments Limited
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