The U.S. Election: What Happens Now?
November 09, 2016
Trump, "You're Hired"
Kamran Khan, CFA - Portfolio Manager
The Trump-related market volatility we’ve witnessed over the last 24 hours and the post-BREXIT bounce in European markets shows it’s very hard to predict the short-term direction of markets. Selling into fear last night was very costly for many investors.
While many may disagree with the outcome of the U.S. presidential election, the reality is almost 50% of Americans feel better today than they have in a long time. These Trump voters are also employees, employers, CEOs, members of senior management, small investors, portfolio managers, pension plan sponsors, among many other positions across society. Today, they are more confident about the U.S. economy’s prospects and their own futures. That increased confidence will help support consumer and business spending and support investor enthusiasm after the initial shock subsides.
In his acceptance speech, Trump said “we will double our growth”. He has a very aggressive plan to improve economic growth in the U.S. that incorporates much more spending than we would see under a Clinton administration. Clinton’s infrastructure plan was to spend $275 billion in her first 100 days. Trump promised to at least double that. Tax reform was a big part of his platform with the promise that individuals, businesses and investors would see lower tax rates. Lower taxes should support consumer spending, business investment and innovation and participation in the stock market. Less regulation should be supportive for many different areas of the market. And Trump has also promised to make it easier to repatriate overseas cash that is held by large corporations doing business globally. Some estimates of this overseas cash exceeds $2 trillion. Under the Obama administration, bringing this cash back to the U.S. would have required paying very high tax rates. Under Trump’s administration, it may be more easily redeployed in the business or used for M&A, dividends and/or share buybacks.
While many may disagree with the outcome of the U.S. presidential election, the reality is almost 50% of Americans feel better today than they have in a long time.
Many pundits have said Trump will ‘soften up’ once he gets into office. Only time will tell, but his acceptance speech showed a much more gracious person that wants to mend broken relationships and bring people together. The following are excerpts from his speech that point to a softer, more presidential Trump. On Hillary Clinton – “I congratulated her and her family on a very, very hard-fought campaign. I mean she fought very hard. Hillary has worked very long and very hard over a long period of time and we owe her a major debt of gratitude for her service to our country. I mean that very sincerely.” On coalition building – “ it's time for America to bind the wounds of division, have to get together, to all Republicans and Democrats and independents across this nation, I say, it is time for us to come together as one united people. I pledge to every citizen of our land that I will be president for all Americans, and this is so important to me.” On reaching out to the disenfranchised – “The forgotten men and women of our country will be forgotten no longer.” On working with foreign nations – “we will get along with all other nations willing to get along with us. I want to tell the world community that while we will always put America's interests first, we will deal fairly with everyone. With everyone. All people, and all other nations. We will seek common ground, not hostility; partnership, not conflict.”
Trump has some grand ambitions as he comes into power with control of Congress. Just like Obama in 2008, he’ll soon discover the difficulties of pushing through an agenda. The U.S. political system separates the powers of government into the executive, legislative and judicial branches in order to keep the country in balance, without too much power accruing to any one branch. He’ll get guidance from a strong Vice President at his side (Mike Pence), has access to fiscally responsible politicians (Chris Christie, Rudy Giuliani) and will need to work with many Republican members of Congress who will not simply ‘go along’ with all of his ideas.
Norrep US Dividend Plus Class went into the election with ~25% cash. That would place our Fund in the top 75 out of almost 2,000 U.S. equity funds when it comes to cash positions. While normally the majority of our cash is earmarked for short put options that we’ve written, this month we were more cautious in writing put options in advance of the election. As of yesterday, our put options accounted for only 8.5% of that ~25% cash position. So our real effective cash was still ~17%. And the median strike price for our puts is ~5.5% below the current stock prices. The Fund offers ample downside protection currently. We will remain cautious in slowly deploying that cash over the next several weeks.
Canadian Markets On A Trump Presidency
Alex Sasso, CFA - Chief Executive Officer and Portfolio Manager
The unexpected happened, and Donald Trump has succeeded in his quest to become President of the United States. The question on investors’ minds today is whether he will also be successful on his quest to “Make America Great Again” through tax cuts, immigration reform, changes to trade agreements and infrastructure spending. While in the midst of the vote count last night expectations were for a very weak day in the equity markets, the market response has been muted thanks in part to Trump’s conciliatory acceptance speech and the prospects for lower taxes, increased government spending and less regulations.
While there are many unknowns at this time, we believe that once the dust settles Canada will see a net benefit from Trump’s policy proposals. On the positive side of things, Trump is calling for lower tax rates (both personal and corporate), which should help bolster the U.S. economy. As the United States’ largest trading partner, Canada should see a benefit. In addition, he also has a more positive stance towards the energy industry compared to his predecessor (i.e. pushing for increased investment in coal and natural gas at the expense of renewable energy, speaking positively about the Keystone XL pipeline project) and has plans to significantly increase infrastructure spending, both of which will have a positive impact on many Canadian companies involved in the resource and construction industries.
The question on investors' minds today is whether he will also be successful on his quest to "Make America Great Again"
The one thing to watch for in Canada is Trump’s view on trade. In his quest to bring lost jobs back to the U.S., Trump spoke about implementing tariffs on imported products and renegotiating the NAFTA agreement. While we expect to see some changes on the trade front, as it was one of his key campaign focuses, we also expect Congress to be wary of the impact that protectionist policies could have on U.S. growth, and therefore expect them to be measured with the changes they allow to be passed. Nevertheless, leading up to the election we began reducing our exposure to companies that export products to the U.S. as this could prove to be a headwind for their business in the coming years.
While we expect to see market volatility continue in the coming weeks, our funds are well positioned as we continue to focus on strong cash flow generative businesses with attractive growth opportunities in today’s economic environment. In addition, we have ensured that each of our funds went into this election period with strong cash positions, which will provide us the opportunity to take advantage of this volatility and add to the performance of the funds.
A Global Perspective On The U.S. Election
Craig Millar, CFA - Chief Investment Officer and Portfolio Manager
Donald Trump has won the U.S. Presidential election, and the Republicans have maintained majorities in the House of Representatives and Senate. This outcome was not priced into the markets, which are only now adjusting. However, it is not all gloom and doom. Markets are now starting to price in the possibility of a large fiscal stimulus, resulting in infrastructure plays such as the Irish cement and construction material producer CRH Plc moving up 8% in Europe this morning. Financial services, healthcare and defense contractors are also seeing strength today, amidst an overall market that has strengthened significantly from its lows overnight.
Trump ran a boisterous campaign, but remember that congress will try to temper a number of Trump’s tough-talk policies. For example, what is the impact of the Trump victory on global trade? For now, markets will assume that global trade will slow. However, keep in mind that people within Trump’s own party will tell him that any U.S. protectionist policies can hurt the U.S. because countries often retaliate with protectionist measures of their own. This blunts the impact and can result in slower growth for both sides. Overall, any increase in protectionism, such as potential increases in tariffs on China, will likely be most negative for emerging markets. However, we have very little exposure to emerging markets in our global funds.
What is the impact of the Trump victory on global trade?
We will likely see a much lighter regulatory environment ahead, especially for energy, financial services, and healthcare. This will benefit the financial services companies which we own in our global funds. In addition, the U.S. yield curve is steepening (the U.S. 10 year yield is going up), which benefits the net interest margins and therefore profitability for banks. Besides regulation, financials are of course impacted by monetary policy. At this point futures markets are still pricing in a 82% chance of a December rate hike1. Increased spending via deficits means that inflationary pressures will tick up, putting more pressure on the Federal Reserve to raise rates in the medium term, which also helps the banks.
Short-term volatility aside, we still see global equities as a good place to be invested over the medium term. Any change in government always creates uncertainty. However, we maintain that Norrep’s diversified global funds are well positioned, offering a nice balance of offense and defense which will continue to serve investors very well over the medium term.
High Yield Markets and the U.S. Election
Bill Holy, MBA, CFA - Portfolio Manager
We have seen a sell-off in longer term U.S. treasuries (10 year yield is 1.94%, up 8.6 bps at time of writing) as investors react negatively to the uncertainty that the U.S. election brings.
At market close on election day the probability of a rate hike in December was 86%1. The Federal Reserve has indicated that it would take into consideration market volatility when determining the next rate increase. This morning the probability fell as low as 76%, but has since rebounded to 82%. The market still believes the Federal Reserve will increase rates in December at this point.
U.S. high yield opened down 25-50 bps but tighter on a spread basis (given the increase in U.S. treasuries). Long term, U.S. high yield will be very sector specific: for example, the election results have generally been positive for bonds in the commodity sector, while we have seen some negative price pressure in industrial exporters like automotive and in some healthcare, such as hospitals.
At this point the market still believes the Federal Reserve will increase rates in December
U.S. loans are steady this morning. As one trader put it: “I can't imagine anyone selling loans based on the election results”. Long term, technical should support loans given the potential for the Federal Reserve to increase rates.
Canadian high yield has seen no change this morning. Bank dealers continue to be well bid and the limited supply in Canada will help prop up prices longer term.
In the short term we expect some volatility, particularly in U.S. high yield, but this will not be a catastrophic event for non-investment grade: one U.S. bond ETF opened down about 20 bps but has since recovered to flat. Longer term we maintain that spreads are reasonable relative to historical levels and that defaults will remain low, particularly outside of energy. Our funds are diversified across asset classes within non-investment grade credit (U.S. loans and bonds, Canadian bonds), which should help manage volatility, and have relatively low durations, which should help offset any downward price pressure should the Federal Reserve increase interest rates.
For More Information:
Alex SassoChief Executive Officer & Portfolio Manager
Alex Sasso is the Chief Executive Officer (CEO) and a Portfolio Manager at Norrep Investments. Alex leads the firm’s small/mid cap investment team. He has over 21 years of investment management experience and is an award winning portfolio manager. Prior…
Alex Sasso CFA
Chief Executive Officer & Portfolio Manager
- ExpertiseCanadian Small and Mid Cap Investing
Alex Sasso is the Chief Executive Officer (CEO) and a Portfolio Manager at Norrep Investments. Alex leads the firm’s small/mid cap investment team. He has over 21 years of investment management experience and is an award winning portfolio manager. Prior to joining Norrep in 2004, Alex worked at a leading retail and institutional investment firm.
Specializing in the Canadian small/mid cap markets, Alex is very passionate about the wealth creation opportunities this segment has to offer. Alex has been the Portfolio Manager of Norrep Fund since 2004, and also manages Norrep II Class, Norrep Income Growth Class and provides oversight on Norrep Entrepreneurs Class.
Alex graduated from the University of Windsor with a Bachelor of Commerce and is a CFA charterholder.
Bill HolyVice President & Portfolio Manager, High Yield Debt
Bill is a member of Norrep's fixed income team, helping manage fixed income exposure throughout the firm's funds. Prior to joining Norrep in 2013, Bill worked as a Director at CIT Group Inc., where he was responsible for investing in…
Bill Holy MBA, CFA
Vice President & Portfolio Manager, High Yield Debt
- ExpertiseFixed Income Investing
Bill is a member of Norrep's fixed income team, helping manage fixed income exposure throughout the firm's funds.
Prior to joining Norrep in 2013, Bill worked as a Director at CIT Group Inc., where he was responsible for investing in middle market corporate debt.
Bill has 17 years of industry experience and holds a Master of Business Administration from the Rotman School of Management, a Bachelor of Commerce from Queen's University. Bill is a CFA charterholder.
Craig MillarChief Investment Officer & Portfolio Manager
Craig Millar is the Chief Investment Officer (CIO) and a Portfolio Manager at Norrep investments. He leads Norrep’s investment management group and specializes in global equities. Craig has 20 years of investment management experience. Prior to joining Norrep in 2005, he…
Craig Millar CFA
Chief Investment Officer & Portfolio Manager
- ExpertiseGlobal Investing
Craig Millar is the Chief Investment Officer (CIO) and a Portfolio Manager at Norrep investments. He leads Norrep’s investment management group and specializes in global equities. Craig has 20 years of investment management experience. Prior to joining Norrep in 2005, he was the lead portfolio manager for three U.S. and international equity funds at a national investment firm.
Craig has a wealth of knowledge in global equities, providing unique and up-to-date perspectives on the global marketplace. He has been the Portfolio Manager of Norrep Global Income Growth Class since 2011, and also manages Norrep Premium Growth Class and Norrep Core Global Pool.
Craig has a degree from Western University and is a CFA charterholder.
Kamran KhanPortfolio Manager
Kamran is a member of the firm's U.S. and global investment team. Prior to joining Norrep in 2006, Kamran was an equity research analyst on several mandates for Altamira Management. Kamran has 19 years of investment experience and holds a business administration degree…
Kamran Khan CFA
- ExpertiseU.S. Investing
Kamran is a member of the firm's U.S. and global investment team.
Prior to joining Norrep in 2006, Kamran was an equity research analyst on several mandates for Altamira Management.
Kamran has 19 years of investment experience and holds a business administration degree from York University and is a CFA charterholder.
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