Are markets bracing for a ‘President Trump’?

4 November 2016

While the asset class returns table for the end of October show very strong Global investment returns for £‑Sterling based investors, the first week of November had a distinctly different flavour: Sell-off At around 3-5% across global stock markets, not yet overly dramatic, but nevertheless – in the US - one of the longest succession of down days (9) in decades. UK investors may have suspected that the spectacular High Court ruling upset markets by creating yet more uncertainty about Britain’s Brexit path to be the cause, however, the negative momentum clearly emanated from US politics. With the US presidential election this coming Tuesday, it was driven by the fear of a ‘President Trump’ becoming reality. Just as with the UK’s EU referendum, what many thought to be unthinkable, has over the past week become a real possibility – Donald Trump being elected US President! The FBI’s reopening of criminal investigations into Clinton’s clumsy mixing up of her private and official email accounts on her Blackberry, while secretary of state under Obama, has cost her much of the lead over Donald Trump. Something, which the week prior seemed unimaginable. Given Trump’s lack of governing experience and outsider status, his election would indeed mean far more uncertainty about the future direction of US policy than Hilary Clinton. Risk asset markets can’t stand uncertainty; hence the stock market falls. Taking a step back and with the post Brexit vote experience behind us, however, a collapse of and lasting turmoil in global stock markets as a reaction to a (still not entirely likely) election of Trump is not my central case of probabilities. I believe that it is far more likely that after the initial shock - predominantly on the side of foreign investors -  markets will refocus on the likely realities a president Trump would face. Just as president Obama was quite limited in what he was able to achieve under the constraints of Washington’s administration apparatus, so would a president Trump. The strengthening of the US economy which was further evidenced over the past week by improving corporate profitability, rising employment, better business sentiment readings and the central bank indicating a December rate rise, is highly likely to bring market emotions quickly back to a very different reality. One of persistent, steady economic growth, which so far has withstood so many headwinds over the past years that an overpromising Donald Trump is unlikely to significantly derail it either – in the short to medium term. Those who are fearful about the short term value development of their investment portfolios, should think back to all the doomsday market scenario predictions ahead of the Brexit referendum and take note that there is currently much less of this type of comment. Some have therefore even interpreted this pre-election stock market sell-off as a buying opportunity after having suffered from far too high cash positions since the immediate post-Brexit days. Back in the UK, politics, judiciary and central bank did their best to compete with the noise coming from across the Atlantic. In combination they helped the battered British currency to regain some ground to the tune of around 2.5%. This surge of £-Sterling was the largest in a week since March. It showed markets’ appreciation of Mark Carney agreeing to remain governor of the Bank of England 1 year longer than originally planned, not hinting at another rate cut following the MPC meeting and the High Court ruling that the Brexit plebiscite could not be used to entirely side-line the elected parliament from any involvement in the process ahead. Despite all the noise to the contrary from Downing Street, I am not entirely convinced that this ruling was not actually greeted with a sigh of relief. After all it provides May with an excuse to triggering Article 50 later than March 2017, which as I wrote before might be a good idea, unless she wanted the first 6 of the 24 months of negotiation time being wasted with avoiding to become subject of the French and German election campaigns. From my perspective, the slight strengthening of Sterling was by far the best news of the past week. It might well be seen as having ‘stopped the rot’ of the currency devaluation, which was beginning to become uncomfortable, given the UK’s dependency on foreign savings to finance the country’s current account deficit. It has reversed a little of the currency derived investment gains shown in the table at the top, but this would be a small price to pay if it meant that the UK can enjoy for longer the positive economic momentum the currency devaluation has brought us since the summer, without having to fear too much of a hangover from this sugar rush further down the line.