Financial world braces itself for period of uncertainty following Trump victory

In his recent, highly polarising yet ultimately successful campaign, US President-elect Donald Trump has been portrayed as a foe to the financial services industry. But as a business tycoon, he has always worked closely with institutions. In fact it was hedge funds, specialising in distressed debt, which came to the rescue of his ailing casinos in Atlantic City, New Jersey.

Now the financial industry is holding its breath as to the effects his policies as president will have on its clients.

Banks and portfolio managers are agreed on one thing. While previous US elections typically led to a period of stability and market calming, Mr Trump’s mercurial nature and paucity of policy content in stump speeches mean the opposite is true.

Investors need to prepare for a period of heightened risk and uncertainty, with safe haven assets such as gold, the Swiss franc and German bunds likely to benefit, before a new political and economic reality is defined, according to US investment firm T Rowe Price. Investors could be headed for a “prolonged period of shock management” and threats to US growth.

As bad as all that?

But once the hubbub has subsided, are prospects really as gloomy as they felt to the shell-shocked public, across the world, who arose from their beds on the morning of November 9?

With globalisation in retreat, a messy process of disengagement from international agreements could mirror the UK’s Brexit negotiations, on the other side of the Atlantic, suggests Amin Rajan, CEO of Create Research and strategy adviser to leading banks and asset managers.

“Bringing jobs back to America, as promised by President-elect Trump, will not be easy, unless he unilaterally tears up numerous treaties that govern international trade.”

Markets and investors could find it tough to adjust to the habits and mores of the new administration, caught between a policy paralysis and eccentric populist promises of building a wall along the Mexican border, slapping massive tariffs on Chinese imports and dispensing with the defence architecture provided by Nato.

Until this rhetoric is replaced by inevitable real politic, investors must re-assess risk tolerance and remain more mindful of political risks than previously.

Firms are also conscious of what the result will mean for bond markets and interest rates. Mr Rajan is convinced the Federal Reserve is likely to raise rates in December and that the rate cycle may accelerate if the new administration embarks on major infrastructure programmes, with implications for the 35-year bond bull market.

The fiscal stimulus which the new administration will push for in order to pay for these public works could lead to higher inflation and a more aggressive Fed, accentuating risk for bond investors, argues Didier Duret, chief investment officer at ABN Amro Private Banking.

Geopolitical risks could increase if the ‘Monroe doctrine’ of American isolationism returns to drive policy. A new approach of perpetually switching alliances could replace the stable system provided by Nato. Mr Duret recommends private clients can minimise these risks by focusing on defensive stocks and commodities.

Indeed several chief investment officers are calling for such rebalancing of portfolios. Expecting a reverse in globalisation after the peak before the election, Julius Baer’s head of investment management, Yves Bonzon, also expects technological disruptions to accelerate, with the corporate world dividing into countries embracing innovation and those rejecting it.

“Investors should favour the first group, because the second group of countries are far more likely to practice financial repression,” says Mr Bonzon.

Further afield

For the US economy, Julius Baer expects a positive outcome and growth, once the uncertainty of Fed stewardship is resolved. It is those countries further from the US that need to be more concerned, he believes, with Mr Trump’s deal-making background leading domestic economics to triumph over his lack of interest in foreign policy. “Other countries may have more to lose than the US from putting America’s interest back on top of Washington’s priorities.”

The danger is that while all eyes are on the US, Europe will suffer most from the US result, with an aggressive Russian president looking westwards, now that Washington will be concentrating on events at home. With a seemingly unstoppable wave of nationalism sweeping through Europe, and right wing parties inspired by both the US and Brexit polls, further political shocks are on the cards.

“The French election could be the most dangerous risk for investors,” warns Alan Higgins, chief investment officer at Coutts. “[Marine] Le Pen says she wants out of the euro. Is this for real?”

If so, then the high stakes with which Europe’s politicians are playing could lead to major losses. This Euro-meltdown would make Mr Trump’s victory and its aftermath in the US look like the result of a minor midnight flutter in one of his casinos.

“We will think carefully about Europe now,” says Mr Higgins. “There may be a case for factoring in a probability of turmoil and even European break-up.”