Aegon UK’s Head of Portfolio Management, Anthony McDonald, provides an update on the market response to the US Presidential Election result and the subsequent actions he’s made to our Risk-Managed Portfolios.
What’s happened?
Donald Trump has been voted the next US President. His election campaign was built upon policy priorities that include extending his 2017 tax cuts, reducing immigration and levying tariffs on imports.
Each of these policy areas would likely increase price pressures in the economy, while the impact on economic growth is likely to be more mixed; tax cuts and a larger budget deficit would be likely to offer short-term stimulus, but immigration curbs and tariffs might well create longer-term growth headwinds.
The economic effects of a Trump presidency will in large part be determined by the speed, commitment and order with which he pursues these policy paths The immediate market response to his victory is understandable. US Government bonds have sold off, the US Dollar has appreciated, US equities have rallied, and emerging market equities have underperformed. An environment of higher price pressures and more government borrowing creates risks for bond investors, while the potential for an initial boost to economic growth and corporate earnings underpin the domestic equity response. Emerging markets are particularly vulnerable to a protectionist trade policy and subsequently underperformed.
Given the new President’s term doesn’t start until January, there may be a period over which these trades can continue to progress in anticipation of a lower-tax, pro-business agenda for government. The main risk might be a more significant rise in government bond yields that undermines economic activity and hence jeopardises the rally in the expensive US equity market.
How we’re responding
In keeping with the valuation-based process, our funds were positioned with an underweight in US equities which has detracted from relative performance in the initial market response. We’ve taken small, immediate steps to reduce emerging market equities and increase our US Dollar exposure given the potential for momentum in the sharp market moves that we have witnessed.
Anthony McDonald is manager of Aegon UK’s Risk-Managed Portfolios.
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