How to Trump-proof your portfolio

American flag

Financial markets have on the whole taken Donald Trump's US election victory in their stride.

Stock markets initially took fright, but swiftly bounced back following Trump's victory speech, which was uncharacteristically measured and gracious.

The opinion polls once again got it wrong, as did various investment strategist and financial commentators, who predicted a heavy short-term sell-off due to the various uncertainties associated with a Trump presidency.

Over the longer term these uncertainties may well come back to haunt financial markets and inflict damage on investors' portfolios. Many of these risks, however, are already well documented, which in turns gives savvy investors the opportunity to Trump-proof their investments.

TRUMP WIN COULD BE GAME-CHANGER FOR BONDS

Trump's victory could completely change the investment landscape. The president elect has pledged to cut taxes and increase infrastructure spending on America's ageing roads, bridges, power grids and airports.

In turn, this is expected to boost company earnings and consumer spending, but ultimately it will widen the US public sector deficit in the years to come, causing inflation to rise and monetary policy to tighten.

To add weight to this argument, Trump has in the past criticised the Federal Reserve for keeping interest rates low, describing the move as creating a 'false economy'. 

'[Trump's proposals] will result in higher bond yields and a steeper yield curve,' notes Luca Paolini, chief strategist at Pictet Asset Management. Paolini adds that rising inflation and a wider deficit could also spell an end to dollar strength, which according to Pictet's models is already some 20 per cent overvalued on a trade-weighted basis.

High-quality bonds with low yields, such as government bonds, will suffer from higher rates and higher inflation. But as Money Observer noted last month, there are various bond inflation insurance policies, including index-linked bond funds or exchanged traded funds. One option, highlight by Psgima's Tom Becket, is the Fidelity Index-Linked Bond fund.

Another way to mitigate risk is to consider bond funds that hold bonds with short lifespans - in other words, that are a couple of years away from maturity. Indeed, some bond fund managers, including James Foster at Artemis, have moved to 'short' government bonds in anticipation that the 35-year bond bull market is coming to an end.

Investment grade and high yield bonds are better placed to ride the storm. Eoin Walsh, co-manager of the TwentyFour Dynamic Bond fund, makes the point that 'if you own yield in this environment, you should probably hang on to it'.

This argument, however, probably doesn't extend to the part of the bond market that offers the highest yields of all - emerging market debt - due to Trump's protectionist agenda. The president-elect has pledged to rip up longstanding trade agreements and impose tariffs on imports.

Jim Cielinski, global head of fixed income at Columbia Threadneedle Investments, notes: 'Trump's victory is most worrisome for this asset class. Aside from the obvious risk to the close trading partners of Latin America, and Mexico in particular, China is also a concern.

'Much depends on trade policy, as many emerging market countries are heavily export dependent to America. Do not expect clarity for several more months.'

Foster adds that one unknown element is the Chinese reaction to being called 'currency manipulators' by Trump. 'The risk is that they respond by selling their substantial holdings of Treasuries. Who knows, but that clearly would be very damaging for bond yields,' says Foster.

FOR EQUITIES

A trade war between America and China cannot be ruled out, and under this scenario the US economy could be knocked off course. Certain stocks would also be hit.

Canaccord Genuity Wealth Management says potential losers are US multinationals with sales exposure to the Asia Pacific region, including Procter & Gamble, Johnson & Johnson and Nike.

Marc Pullen, senior equity analyst at the firm, adds that many companies may also lose out, including those that source parts or even their entire products from China, such as Apple. 'So even those US companies with relatively few sales to China could suffer in terms of profit margins,' says Pullen.

The emerging market regions, however, could end up being among the biggest equity market losers.

That's a point made by Neil Woodford, who manages the CF Woodford Equity Income fund; he says he expects globalisation to come under the spotlight under a Trump administration, and as a result investors should 'expect a greater focus on domestic political priorities at the expense of free trade and globalisation'.

Consumer goods giants, the so-called bond proxies, the likes of Unilever and Diageo, are also tipped to be among the losers, due to the expectation that both interest rates and bond yields will rise.

The widely held view is that when the interest rate cycle turns and assets other than equities start to look attractive again, bond proxies will be ditched and their share prices will fall.

Sarasin & Partners' Guy Monson says that he now prefers 'local franchises over internationally focused businesses'.

Among the winners Monson expects a further recovery in high quality US banks and a sharp recovery in some of the best global pharmaceutical franchises, which had sold off in an anticipation of a Hilary Clinton victory.

HOW TO TWEAK YOUR FUND CHOICE

There will also be fund winners and losers, and it may pay fund investors to switch to a holding more likely to benefit under Trump's presidency.

Jason Hollands, of adviser Tilney Bestinvest, tipped First State Global Listed Infrastructure, Axa Framlington Health and Investec Enhanced Natural Resources.

The latter fund, Hollands says, 'could capitalise on demand for raw materials that arises from increased infrastructure spend, but it is important to bear in mind that increase US demand needs to be weighed against a slowdown in demand from China.'

But at uncertain times it ultimately pays in the long run to adopt a diversified approach and have a segment of your portfolio in safe havens, such as gold or funds that invest in an extremely cautious manner. Options include Personal Assets and RIT Capital Partners, with the latter being one of Money Observer's Rated Funds.

Patrick Gordon, a senior market strategist at Killik, says: 'As with Brexit, it is times like these where diversification is particularly important. It remains difficult to call currency moves and short-term asset price swings, but a diversified portfolio, both by asset class and geography, should help to cushion the impact of heightened volatility.'


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