In the wake of Donald Trump's election victory, how should fixed income investors approach an impending Trump presidency?
Citywire Selector has collated the views of bond managers from across Europe and the US to see how they are planning to navigate the market.
The head of European fixed income at Franklin Templeton Investments David Zahn said it will take time for Trump’s policies to be implemented.
It is important to bear in mind, that while all of this has been going on, we have seen some uptick in underlying macro-fundamentals. US jobs growth has been positive, and in Europe, while growth has been slow, it has been positive.
We will be keeping a close eye on credit in Europe, looking at any names that might have been sold off more than their underlying value.
Looking at the longer term implications of the Republication victory for Europe, there are a few immediate questions. Notably, regarding trade and international relations. Trump has taken the stance that overseas US partners should increase military spend.
This could have a knock on impact for Brexit negotiations, as we might see the UK and Europe wanting to maintain more a group mentality, given the UK’s relatively large military spend in comparison to Europe.
Additionally, the next big thing we are watching in Europe will be the Italian Referendum. It will be interesting to see how this plays out in light of a Trump victory, and whether we see the “No” campaign gain increased traction.
It will also be interesting to see how this flows to the German and French elections next year, in terms of whether the Trump victory encourages increased support for populist parties.
Expect the unexpected
AllianceBernstein’s John Taylor, who manages several fixed income funds, said Trump’s win is a reminder that investors should watch out for upcoming political events.
The surprise victory by Trump is another reminder that markets should expect the unexpected. For bond investor this is a poignant reminder to plan ahead and think about diversification, seek safe havens with decent yields and being aware of the liquidity traps if everyone rushes for an exit.
The market focus now has shifted from expecting the Fed hike to who might become the next Fed chairman.
It’s also important that investors don’t ignore other upcoming political events such as the Italian referendum, important elections in the larger European countries in 2017 and ongoing Brexit negotiations. Moreover, the ECB have an important role to play in manging investor expectations with regard to the future path of monetary policy in their December meeting.
There are likely to be opportunities aplenty for flexible investors that can maintain that discipline of selling when valuations look stretched and being prepared to go against the crowd and investing when fear is elevated.
Monetary policy has reached its limits
Citywire A-rated Ariel Bezalel has already made changes to his Jupiter Strategic Bond fund, such as credit spread hedges (2.16% North American HY CDX and 2.95% European Crossover), as well as cutting longer-dated IG and HY bonds, resulting in half of the fund having a maturity under two years.
We did not position our portfolio specifically to benefit from a Trump or a Clinton win. However, generally, it is our belief that monetary policy has reached its limits, whether it be in the US, Europe or Japan among others; future stimulus is very likely to be fiscal in nature. Trump is likely to deliver an expansionary policy to encourage economic growth.
It would have been the same if Clinton had won. This shift in thinking about the nature of stimulus going forward was one of the key reasons why we reduced the duration of the portfolio significantly since July from 5.1 to 2.9 years today.
We did this mainly by selling our medium and long dated US Treasuries and initiating a short position in the bund (around 10% of the portfolio) back when they were trading with negative yields.