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US election 2016: What Trump's victory means for your stocks and portfolio strategy

Glenn Freeman  |  10 Nov 2016Text size  Decrease  Increase  |  

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As financial markets absorb the news that Donald J. Trump will become the 45th President of the United States, you should stick to your strategy and avoid reactive decisions.


Donald Trump will only get the keys to the White House in January 2017. Until then, the new government's policy agenda, key leadership positions and likely changes in foreign and trade policy are largely unknown.

For individual investors, the core message is to remain calm.

"Before making any decision in the heat of the moment, we recommend that investors consult their financial advisers," says Dan McNeela, Morningstar Investment Management's Chicago-based co-head of target risk strategies and senior portfolio manager.

"We appreciate that the current period is unsettling. We hope that investors keep their emotions in check and continue to focus on their long-term goals."

The situation so far

In terms of market reaction, fears of a protracted selloff proved unfounded--despite the 5 per cent decline in US stock futures that occurred on Tuesday evening (US time) as Trump's electoral vote count began to gain on the Hillary Clinton tally.

In Australia, on Wednesday the S&P/ASX 200 ended 1.9 per cent lower, having swung wildly from early gains of 1.1 per cent, to a low point that was down 3.9 per cent as it followed NYSE futures.

However, today the ASX jumped 3 per cent in opening trade, adding more than $45 billion to the market's value, entirely covering yesterday's losses.

When US markets reopened on Wednesday morning, the major indices were flat, oil was off less than 1 per cent, and gold rose 1 per cent.

Emerging markets traded lower by about 2.5 per cent, with Mexico's market down about 8 per cent.

"The initial bout of volatility showed, once again, that markets abhor uncertainty. Pundits had widely predicted a victory for Clinton, and markets were comforted in the days leading up to the election by expected continuity with current government policies. Trump's win upended that calculation and caused investors to ponder the potential impact of his policy goals," says McNeela.

Despite the overwhelming reaction of shock to the US election, with few predicting a Republican clean sweep, the outcome didn't catch Morningstar's portfolios off-guard.

"We had not positioned the portfolios based on any guesses about the outcome of the election, and therefore had no positions to reverse when the surprise result occurred. Our portfolios are driven by long-term valuation-driven investing. Events like this make us glad we're not peering into a crystal ball and betting investors' portfolios on our predictions about the future," McNeela says.

Andrew Lill, chief investment officer, Asia Pacific, Morningstar Investment Management, also emphasises the valuation approach that embodies its process.

"While these are uncharted waters politically, volatility in capital markets is nothing new and on this occasion--as in the past--prudence and patience will win. For this reason, we favour research over reaction, and urge other investors to do the same.

"As long-term investors, we need to appreciate and acknowledge this important difference, if we are to avoid the hype, and focus on the real drivers of investment returns. On this note, we must come back to the two variables to successful investing: the current price and the long-term fair value," Lill says.

He believes the real risk a Trump government poses to investors is the potential impairment of the fair value of assets--though sees this as unlikely due to the finite nature of 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."

McNeela echoes these comments, emphasising Morningstar's 'business as usual' approach amid the rhetoric of fear and uncertainty.

"Our investment process continues as it always has. We look to buy assets that are selling at a significant discount to their fair value. Negative sentiment and heavy selling, often driven by fears of what might happen, have historically created the best opportunities for value investors," McNeela says.

"While we never wish for markets to crumble, we stand ready to profit from any such opportunities that present themselves."

Implications for stocks, bonds

As mentioned earlier, given Donald Trump's term as President will only begin in 2017, "we think it's far too early to buy into the worst-case scenario," says McNeela.

In the period before his inauguration, the incoming President and his leadership team will re-visit their campaign "promises" and establish which are realistically achievable and which were merely talking points.

"As they recognise that change can only occur through consensus with legislators in the Senate and House of Representatives," McNeela says.

He believes US stocks could receive a short-term boost if some of the pro-growth policies are prioritised, however, with a view that these are largely over-valued, Morningstar's multi-asset class portfolios are underweight US stocks.

"Our stock basket portfolios are focused on buying companies that have a margin of safety, which we believe is the best tool for minimising risk," McNeela says.

In Australia, Lill's team also believes global equity and fixed interest markets are expensive, and in response, holds elevated levels of cash while waiting for "compelling investment opportunities".

"This has also seen us repositioning our portfolios further away from expensive asset classes such as domestic and global fixed income, in favour of inflation-linked bonds and cash, believing that the market was not correctly pricing in the likelihood of normal US interest rates and inflation ahead," Lill says.

He refers to an expectation that Trump's spending plans will lead to higher interest rates and greater inflation expectations.

“We continue to see attractive opportunities, supported by a margin of safety, in select emerging market, Japanese, and European equity markets, notwithstanding that these asset classes may get swept up in any near-term market hysteria.

"In this sense, turbulent markets can create great opportunities for value investors to purchase assets that will add meaningfully to returns in the future," Lill says.

A Brexit moment?

Many commentators have drawn comparisons between the election of Trump to the US Presidency and Britain's vote to exit the European Union (Brexit)--though Lill sees timeframe as one fundamental difference.

"Brexit is likely to be a permanent phenomenon, which could have a significant impact on long-term economic growth, and therefore be more likely to adversely affect our calculation of ‘fair’ or ‘intrinsic’ value.

"A Trump presidency is not permanent, which lends itself to sentimental change, with less long-term significance."

More from Morningstar

The victory few saw coming and its impact on markets

US election 2016: Sit tight, whatever the outcome


Glenn Freeman is Morningstar's senior editor.

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