The Trump effect
In the weeks leading up to the presidential election, equities fell anytime Donald Trump got a bump in the polls, and gained when Hillary Clinton rose in the polls. Any observer easily concluded that a Trump win would be bad for equities, while a Clinton win would be positive. An investor with perfect advance foresight of a Trump win would have sold all his equity holdings, with disastrous consequences for his long-term performance.
If any investor needed proof to beware of consensus views, which is one of my recurring themes to avoid making big mistakes in the managing of one's investments, 2016 gave plenty of opportunities to learn and cement this lesson.
From the initial January-February selloff which presaged a negative year for equities (the much misquoted "January effect"), to Brexit, the Trump win, and the Italian referendum, all proved that consensus did not even closely anticipate the final outcome. Most importantly, especially for the last three political events, the consensus market selloff from the "negative" outcome never materialised.
Markets are clearly pricing in a lot of positives from a business-friendly Trump presidency, especially the reflationary pressures that he is expected to bring, particularly to onshore US equities. While all the commentary has focused on whether US equities are becoming too overvalued, the fact that inflationary pressures were already building long before Mr Trump won the election is not getting much discussion, and not just in the US, but globally, such as:
The Trump presidency has merely accelerated the expectations for higher inflation, bringing forward future gains in prices. It is probable that the high expectations placed on Mr Trump are overdone in the short term, as too much credit is regularly given to the president of any country for influencing the economy.
The following expected outcomes are likely to be right over the longer term, but markets will likely be disappointed in the short term, presenting investment opportunities:
The above are all for shorter-term potential portfolio positioning given current over-optimistic expectations. At any time these expectations are proven excessive during the year, it will be an opportunity for investors to add securities that have a positive correlation to higher interest rates, given that the longer-term picture still points towards higher inflation.
AL Wealth Partners is an independent Singapore-based company providing fund management and advisory services to accredited investors
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