With the shock result of the United Kingdom’s “Brexit” poll fresh in investors’ minds, the narrowing in the odds over the past week of Donald Trump becoming the next President of the United States has rattled markets.

“A victory for Donald Trump in this week’s long-awaited US presidential election could result a global trade war,” the University of NSW Business School’s Tim Harcourt said.

“Any hint that he would be elected is likely to spark a sell-off in share-markets around the world.”

Harcourt, who was previously chief economist at Austrade, predicted Trump would be the most isolationist and protectionist US President since Herbert Hoover in the 1920s.

“It’s actually quite alarming for the world, particularly if he [Trump] put up tariffs and cancelled trade agreements.”

With many Australian superannuation fund members still scarred by the losses following the 2008 global financial crisis, a major sell-off following a surprise Trump win could deliver a major sentiment blow to the $2.1 trillion national retirement savings pool.

The early results from the US Presidential poll will be known Wednesday afternoon Australian time.

Ahead of the result, four top investment chiefs – from MLC, AMP Capital, Cbus, and Perpetual – told Investment Magazine how they had prepared for the prospect of a Trump victory.

 

What do you think a Trump win would mean for markets in the short term? in the medium term? in the long term?

 

MLC chief investment officer Jonathan Armitage: We believe the immediate reaction would be a “risk-off” environment, with a softening for equity markets with US treasuries acting as a safe haven in the first instance, but the Trump scenario is not without risk for bonds. We might also see a weaker US dollar as the prospect of a December rate rise is priced out.

Perpetual head of investment strategy Matthew Sherwood: There is no doubt that financial market volatility will be notably amplified with a Trump win. But the US market declined for nine consecutive sessions – despite better economic data and a highly constructive earnings season – which suggests that markets have partially recalibrated for a Trump win, which sounds sensible.

If Trump wins the US sharemarket and US bond yields are likely to decline on asset re-allocation but perhaps a bit less than expected, whereas the US Federal Reserve will delay any policy move. 

On a longer term view active asset allocation will be crucial in meeting long term investment objectives. Such as holding a substantial allocation to cash to buffer any downturn and to capitalise on such a sell-off. 

Cbus head of investment strategy Kristian Fok: More market volatility. Possibly in the shorter term about a 5 per cent fall in equities markets. Medium and longer-term we will assess based on the composition of Congress.

AMP Capital head of multi-asset portfolio management Debbie Alliston: It is difficult to be definitive about what a Clinton or Trump victory will lead to over time. However, we are comfortable making the following assessments:

  • The US equity market is the most expensive of the developed markets.
  • A Trump victory is more likely to create short-term market volatility and introduce more uncertainty than a Clinton victory.
  • The US Federal Reserve appears poised to raise cash rates; bond yields are likely to continue to move higher over time
  • It is unclear whether US safe haven assets, such as bonds and the US dollar, would rally following a Trump victory.

 

How have you repositioned your fund’s balanced portfolio ahead of the US election?

Armitage: Our funds are defensively positioned and have been for some time.  

Sherwood: No-one can forecast the result and there is no historic precedent, and, as a result, we have remained neutral in asset allocation in our multi-asset funds. We are value-based fund manager so we don’t take positons based on speculation or possibilities. We are aware of the cycle and we will respond to opportunities.

Fok: We haven’t explicitly, but we have generally reduced equities exposures over the past couple of months and this was taken into consideration.

Alliston: In our flagship corporate super balanced fund, we have maintained an underweight in portfolios to US equities and a corresponding overweight to European and emerging markets on improving fundamentals and relative valuations.

We are underweight US duration and have introduced some inflation protection as we see inflation indicators ticking up across the board in the US.

In recognition of heightened event risk and the potential for short-term volatility over coming months, we used low volatility through October to take out option protection on US equities through to December using a risk reversal strategy.

 

What proportion of the balanced portfolio are you holding in cash?

Armitage: In our MLC Horizon 4 Balanced Portfolio we currently hold 4 per cent in cash.  In our real-return MLC Inflation Plus Moderate Portfolio we are holding 16.5 per cent in cash. 

Sherwood: A significant proportion.

Fok: Around 11 per cent.

Alliston: Around 11 per cent.  With the current low level of bond yields, the opportunity cost of holding cash relative to bonds is low. Combined with our view that bond yields are likely to continue to move higher over the medium term, we are happy to be underweight fixed interest with a corresponding overweight to cash.

 

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