After a momentous week which will see Donald Trump return to the White House next January and rate cuts by the Bank of England and Federal Reserve, James Klempster discusses the potential impact.
Hello, it's Friday 8th November. I thought we'd pause for a few moments and reflect on what's been going on in markets this week. We could talk about the Bank of England and its rate cut or the Federal Reserve's decision this week. But we have to focus on the key story of the week, the US presidential election.
It's been a resounding victory for Donald Trump, and it looks likely that he'll get the so-called Republican clean sweep. It's priced in now even though the House of Representatives has yet to be fully counted. Arguably, the pollsters did a better job than in 2016 of predicting the outcome, but there were some concerns in the build-up to the election that to compensate for the undercounting in 2016, they may have gone too far the other way. It turns out that wasn't the case.
Reflecting on these hugely complicated models that they use, they have a lot of robustness built into them, but even then, they're not a perfect method of predicting what will happen. Nothing is, of course. The thing about predictions is that they're always difficult to make about the future. Whether it be sophisticated polling or market models, they have fragilities, frailties, errors and unpredictability built into them. It's a nice reminder from an investment perspective of the fact that models can be charming and attractive because of their complexity and apparent ability to predict the future almost. But despite their sophistication and the thousands, if not millions, of data points and other inputs they have going into them, they still have the same fragilities, frailties and blind spots.
Imperfect predictions
This week was a fascinating reminder that prediction is always difficult, and in politics doubly so. Models have some great characteristics but they are imperfect, and people are fickle: decisions made even by a large number of people do not always sit around perfect averages or expectations. You can see moves away and drifts, and that type of drift is where you see mispricing come into markets as well. There is a nice linkage in terms of expectations and reality when it comes to markets and politics.
In terms of expectations, we have seen this so-called Trump trade come to the fore in the last couple of weeks. Markets were starting to price in a greater chance of Donald Trump's return to the White House. Nevertheless, the strength of markets over the last couple of days tells us that it clearly wasn't fully priced in. We've had the S&P 500 now up 25% year-to-date, so it has done very well. In fact, it's the best year-to-date performance we've seen to this point in November since the late 1990s. And investment grade credit spreads are down to 75 basis points. Again, this is a measure of corporate health and risk of default. They are at their lowest levels since the late 1990s as well. So there is a lot of positivity arguably being reflected in markets at the moment.
As always with these things, you have positivity on top of what we've already spoken about as being high valuations in these videos, particularly in the larger names in the US. We need to be careful when thinking about portfolio construction and building a US exposure, because you have new positivity and hubris perhaps on top of already high valuations. It's a combination that can lead to air pockets forming underneath. As we know, the space for disappointment sits there between expectations and the reality you get. The bigger the gap between expectations and reality, the bigger the chance for disappointment. Just something to bear in mind when thinking about US exposure. There's a lot of good news in the price there today.
Trump’s policies
In terms of the likely policy direction, we've seen a clear trend toward 'America First' in the presidential election campaign. It tallies very nicely with several of the major themes we've been talking about in these videos, such as the idea of a pulling back from globalisation and moves toward a more multi-polar world. These are very much the themes that we've already seen in play, but it's quite possible that the new president catalyses some of these trends.
There are Interesting points around global trade. The idea of greater and significant tariffs being applied to China, for example, and possibly even to Europe. But there are already several tariffs on China in place. It is more a difference of degree than a difference of principle. It is worth reflecting on the fact that Joe Biden had a pretty hawkish stance toward China, albeit a less vocally hawkish one. One of the hallmarks of Trump's original presidency was a lot of noise and rhetoric. And perhaps that was one of the big differences between the Trump and Biden approaches to China, which were both cautious, but one vocally and outright cautious, whereas the other perhaps a bit more statesman-like.
There is a broad assumption, or consensus, that Trump's policies are likely to be a bit on the inflationary side. You can see why that would be true for tariffs, famously inflation impacting domestic consumers, and certainly in the short term. There's also an argument that he'll try and have more influence on the Federal Reserve to get interest rates down more quickly. He's been vocally critical of Jay Powell in the past. The Federal Reserve is politically independent, but you can imagine a scenario where there's a lot of leverage applied to pull interest rates down, which might leave room for some more inflationary pressures to bubble up. At the same time, the tax cuts that the market's responding to arguably should, at least in the short run, be a little less inflationary, taking some of that inflationary pulse out of the economy. But over the long run, it might well be inflationary too. That's the broad consensus – marginally more inflationary. Obviously, we'll only really know that with the benefit of hindsight so we can come back and address that in the years to come.
The other thing to bear in mind when it comes to Donald Trump as a returning US president – one of only two in history to do a presidential term, go away and then come back successfully to do a second term – is that he's more of a known quantity this time than perhaps he was last time. And that's perhaps why markets were a bit more buoyant this time than they were when he was elected in 2016. It was more of a cautious welcome back in 2016, whereas this one has been more positive.
One of the things about Donald Trump is that he was a quintessentially noisy president in his first term. We saw a lot of pronouncements and news flow, some of which were through less official channels, but it didn't necessarily mean that the policy decisions that were made were in line with all the talk. There was a dissonance between the information you got through news flow and what ended up happening. You could say his bark was worse than his bite in many ways. We'll see where the presidency goes from here because if some of the rhetoric that we've had on the way to the election doesn't come to bear, then that would be another example of how things tend toward more middling outcomes rather than more extreme ones. In the US, which is a proud democracy with lots of checks and balances and the rule of law, you would expect to see a degree of tendency toward more centrist outcomes through the political process there.
Clearly, there is a lot of uncertainty out there. It is one of those fascinating weeks that bring a lot of new information to the table that we have to digest. As the polling showed, it's dangerous to put all your eggs in any one particular basket. That's why, as always, we firmly believe in diversification of asset classes, geographies, regions and all the rest of it when we think about building our portfolios in the Liontrust Multi-Asset team.
That's it from me. Have a good weekend when you get there and we'll see you next time.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks:
Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value. The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay; Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss; Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected; Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time; Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies; Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates. Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices. Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.