Opportunities in post-Trump world

As markets rebound from their initial shock at the Trump victory in the US, New Zealand investors are being told there are opportunities to be found.

Monday, November 14th 2016, 6:00AM

by Susan Edmunds

George Carter

Markets retreated sharply on Wednesday (NZT) as it became clear that Trump would be the victor in the presidential election, ahead of Hillary Clinton.

But in most cases, those falls have since more than reversed.

Nikko Asset Management’s New Zealand head, George Carter, said there had not been any movements that were cause for particular alarm or panic for New Zealanders.

“Trump may well replace Yellen after her term finishes in early 2018, and new Fed appointments are likely to be more hawkish. This means both monetary and fiscal policies are likely to lead to higher inflation, and higher yields at both the short and long ends of the curve – but this is a long way from concluding we’re about to witness a bond market crash,” he said.

“For equities, if anything, US businesses should see a slight boost to the extent that Trump desires to ease regulatory and tax burdens. It’s extremely difficult to assess any particular macroeconomic theme that will impact NZ equities as a result of the US election. We note that New Zealand as an economy remains attractive, and NZ assets are desirable on a global stage – and we don’t expect this dynamic to change in the foreseeable future.”

He said one thing to watch for was whether equities that had benefited from investors’ hunt for yield could underperform if bond yields went higher.

Trump’s policies are expected to be inflationary and commentators said it was likely that longer-term interest rates would be higher than they might otherwise have been.

Carter said while the Reserve Bank had signaled there was unlikely to be any monetary policy change for some time, more easing here was unlikely.

“A slight bias to shorter duration bonds and remaining in high quality assets is our approach to managing fixed income assets in the current environment.”

The yield on the 10-year US Treasury note was late last week up 33.5 basis points on the week before, the biggest jump in three years.

Andrew Lill, of Morningstar, said the fact that there was a time limit on Trump’s position of power made the win different to an event such as Brexit.

“Ultimately, the real risk to investors of a Trump government is that it results in an impairment of the fair value of assets. At this stage, our early judgement is that a significant impairment is unlikely due to the political cycle. As we view risk as the permanent loss of capital, as opposed to short-term volatility, a Trump government is unlikely to materially shift our already conservative positioning in this regard. As always, buying assets that have a wide margin of safety is the key to successful investing.”

He said there were still attractive opportunities, supported by a margin of safety, in emerging market, Japanese, and European equity markets.

Some emerging markets have experienced a more sustained sell-off since the election result was revealed, largely due to trade concerns.

“Turbulent markets can create great opportunities for value investors to purchase assets that will add meaningfully to returns in the future,” Lill said.

John Carran, Gareth Morgan Investments senior economist, said US elections had not traditionally had a long-lasting effect on markets.

“Shares remain attractive relative to bonds in the present low-yield environment. At this stage, we do not see risks from the US election that materially affects that view. More important for medium-term prospects are the level of share and bond valuations, central bank actions, the health of people’s balance sheets, and other fundamental factors.”

Tags: bonds equities