Despite what every pollster, bookmaker, Democrat, Wall Streeter, and soothsayer with a crystal ball had to say, The Donald was anointed the 45th President of the U.S.A. And as 2016 has shown, people in the business of prediction clearly need to ask themselves just one question…… “Why do I still have a job and who am I fooling?” Okay two.
Depending on which side you backed, strains of “Taps” (yes the one bugled at American military funerals) and the contrastingly upbeat “Hail To The Chief” were played across the (sadly) Divided States of America and even the global landscape. Such was the ramification of this particularly polarising event. In the end what looked initially like financial Armageddon, ended in a very surprising boost to markets (on the day, but not before a massive drop, and throughout November), aided in part by Trump’s surprisingly conciliatory victory speech, diluting months of his harsh and divisive pre-election rhetoric.
International markets reactions were however, unsurprisingly, mixed. Trump’s rallying cries to boost manufacturing and bring back employment to middle America, clearly struck a chord as US stock indices powered ahead an average of 5% for the month, with the Russell 2000 small caps index up a whopping 12% alone! Contrast this with the Nasdaq 100 just eking a 0.9% gain. A lot of unexcited Democrats running this industry clearly. And aside from Australia (up 2.8%), the rest of the world however didn’t feel as hot. Major ETFs tracking Europe, Asia and emerging markets were down over 3% on average. Latin America, whose outstanding year-to-date performance (via a popular ETF) we highlighted last edition, corrected a sharp 6.7% for the month. No tequila shots this time unfortunately.
Away from the surprisingly and generally positive market response to the election result, a marked sell off in fixed income took place across November, finally breaking correlation with stock movements. Amid the great deal of uncertainty (posed by the incoming Trump administration), yields unexpectedly rose (bonds are typically investor BFFs during such times)! The general consensus seems to be that promises of massive infrastructure spending, lowering taxes and deregulation are all potentially expansionary and investors are therefore anticipating a rise (seriously this time) in inflation. Such expectations translate into a demand for higher bond yields (to compensate eroding real returns), in turn pushing the prices of these assets down.
Commodities too had a good month overall as passengers on the “reflation” trade. OPEC looked like it made some sort of firm decision (for an oil supply cut), on paper at least, but it remains to be seen if what is said, is in fact done. A worthy mention in this asset class is copper, one of the accepted bellwethers of economic activity, rising nearly 20% to continue a late October surge supported by more positive economic data from China and speculation on the new U.S. administration’s policies.
Surging iron prices also continued to improve the fortunes of BHP, Rio, Fortescue and the like, lifting local share indices as we noted earlier. The Aussie dollar held its ground for the most part to finish just under 75 cents (vs the USD) despite a surging greenback, which has been re-energized over the last 6 months. The R.B.A. chose to leave rates on hold during its November meet. Watch this space as the chances of a strengthening U.S. dollar, pumped up by some “Trumpspired” inflation, could provide scope for the R.B.A. to raise in 2017 without the threat of hurting our Aussie exporters.
In house our bond exposures, while unable to shake off the wider sell off, still managed to limit the downside to between 0.5% and 1.6%. Infrastructure and Asian exposures went down a couple of percentage points while property was a smidge over flat. Our Aussie share managers were mixed ranging between -1.6% to +2%. Given the sizeable portfolio weightings to America (and in a limited way to Japan), our international large and small cap investments were the stars for the month, up nearly 5% on average.
What will he do? And how it will it affect the global economy? As there was never much clarity throughout the election campaign (and not much more since), and despite the market possibly jumping ahead of itself on the inflation train, caution is still your best friend (unfortunately/fortunately whichever way you want to look at it).
The bigger issue, however, is the apparent rise in popularity (the world over) of seemingly far right, anti-establishment, populist parties. And with it, the shared commonality in their associated protectionist trade policies. With the European Union once again at risk with the upcoming Italian referendum, the replay of the Austrian elections (too close to call the last time apparently) and the French and Dutch elections due in early 2017 (and its respective far right parties poised to make a dent), it remains a wait, see and more importantly (for our clients), an adapt game. In investments, just as in life, to adapt is to survive.
Oh yeah, that and the US interest rate decision in December.
It may sound almost vulgar, but it is the industrial phenomenon that turned the U.S.A. into a net oil exporter in 2013 (for the first time since 1995). A slang term for “hydraulic fracturing”, fracking is basically how one goes about extracting “shale oil” (and gas) from the ground. Ok to be more clear……
“During fracking, cracks are created in rocks and rock formations. This is accomplished by injecting fluid into existing voids until they break open. The fluids are pumped down into the rocks to create larger fissures. Oil and gas from the surrounding shale flows into the fissures and forced down into the bored well, from where it can be extracted.”**
Like America’s new president, it has been a highly divisive industry what with its ability to create economic prosperity (putting states like North Dakota – previously famous for being one of the most “cowboy” states in America but in recent times the recipient of one of the lowest state unemployment rates in the nation – on the map!) yet at the same time incurring the wrath of environmentalists for “poisoning” the earth with its signature chemical cocktail injections.
What cannot be dismissed is its impact on global oil supply and prices. If you were wondering why we’ve been swimming in low oil prices for so long, this is one reason to wonder no more. Fracking however, is typically more expensive than your conventional means of oil extraction so if the oil price isn’t right (as it has been for a while), the industry tends to feel a little fracked over.