November 11, 2016
BY: MARK NOBLE, SENIOR VICE-PRESIDENT, ETF STRATEGY, HORIZONS ETFS
1. Potential negative impact on CAD/U.S. Dollar
2. Expected negative impact on U.S. Treasuries
3. Select equity markets are expected to be positively impacted by increased deregulation and privatization
Similar to the Brexit vote back in June, the surprise election of Donald Trump as the President of the United States on November 8th put global stock markets into a tailspin overnight. The following day, the U.S. stock market bounced back to finish the day on a positive note.
Why the big divergence between Brexit and this political upset? Part of it is the unknown, because there is little consensus on what a Trump administration will look like from an economic standpoint. For this reason, the overwhelming advice from our investment professionals is to stay the course. There are, however, several overarching themes to note.
The Canadian Dollar
Trump’s presidency will likely be most acutely felt in the value of the Canadian dollar. The United States is Canada’s largest trading partner, accounting for more than 70% of Canadian exports.
The Canadian dollar stands to lose the most with the looming threat of potentially higher trade barriers and a protracted campaign to roll back NAFTA and the Trans-Pacific Partnership free-trade deals.
Accordingly, non-hedged ETFs like the Horizons S&P 500 Index ETF (“HXS”) and the Horizons Active Global Dividend ETF (“HAZ”), which removed its Canadian hedge last month, should benefit directly from the move in the U.S. dollar. Going forward, the loonie may continue to be at the mercy of U.S. economic policy.
“Under Trump, fear of the U.S. adopting a more protectionist trade approach is likely to lead financial markets to price in slower economic growth and higher inflation. This could lead to a correction in equity markets and a rise in bond yields. A strong U.S. dollar is also likely on the back of declining trade partner currencies such as the Canadian dollar and the Mexican peso, which both stand to lose the most in a likely change in U.S. policy.” – Luc de la Durantaye, Managing Director, Asset Allocation and Currency Management at CIBC Asset Management, the sub-advisor of the Horizons Active Global Currency Opportunities (HGC).
Fixed Income and Interest Rates
This is another area of potential significant change in the global markets. According to Bloomberg, there is still an 80% likelihood that the U.S. Federal Reserve will raise interest rates in December 2016. Currently the market is only pricing in a 50% likelihood of an interest rate rise in December 2016.
Despite this, U.S. treasuries seemed on the decline amid speculation that Trump will ultimately ramp-up government spending to pay for expensive infrastructure and military spending. He could also potentially engage in a wholesale audit of the Federal Reserve, an institution he’s been very critical of, which could further delay increases.
There are certainly stronger headwinds for fixed income investors, according to Fiera Capital, the primary sub-advisor on our lineup of actively managed fixed income ETFs. Fiera tends to position its fixed income asset allocation based on statistical scenarios. They anticipated a 60% likelihood of a reflationary scenario, where interest rates would rise as a result of positive economic growth in the U.S., which would benefit corporate bonds, preferred shares and high yield bonds. They are currently reviewing the impact a Trump presidency might have on fixed income.
IMPACT ON INVESTMENT STRATEGY
“Under a Trump Presidency, the political and economic landscape has changed substantially, with notable downside risks to our central scenario stemming from the heightened level of anxiety surrounding Mr. Trump’s drastic and unconventional policy proposals. While we are indeed in the midst of a mild economic upswing, the Trump presidency risks threatening the status of the global economic recovery and accordingly, our central scenario for a synchronized global expansion. Specifically, the environment of amplified uncertainty could adversely impact consumer spending and curtail business investment, while the potential for protectionist policies poses considerable risks to global trade and the global economy in general.
Taken together, the future remains highly uncertain with Donald Trump in the White House and risks to our outlook have increased in accordance, which warrants some caution and a reassessment of our longer-term forecasts, economic outlook, and investment strategy.“ – Fiera Capital
Since a Clinton win was anticipated, the results were clearly a shock to the equity markets. In spite of the surprise, the equity markets remain resilient, even outperforming in certain sectors due to Trump’s stance on deregulation and privatization.
Biotech and Pharma: With Clinton, pharmaceutical and biotech companies were facing a host of potential regulations and price controls. Those are likely off-the-table with Trump. These stocks have subsequently rallied significantly.
Financials: While Clinton had significant backing from Wall Street, that was more related to the view that she would be a better steward of the economy. From a regulatory perspective, she would likely continue to push hard for further regulation of the financial services industry. Again, with Trump, a lot of this regulation is likely off-the-table, which should help increase Wall Street and banking profits.
Prison Stocks: Back in August, the Department of Justice said they would stop using private prisons for federal inmates, a commitment Clinton reaffirmed in September. Again, this may be moot with a Trump administration. Corrections Corporation of America for example, was up more than 45% and GEO Group, which is held by HAZ, was up more than 20%.
In relation to HAZ, the portfolio management team at Guardian Capital LP began de-risking the portfolio months ago in anticipation of a broad rally in equities. They have consistently been focused on holding equities that have high quality balance sheets, positive cash flows and relatively low-interest-rate sensitivity in anticipation of a potential pullback. During periods of heightened volatility (such as currently and post- Brexit), HAZ typically does well versus both the broad market and its peer group.
“We have already reduced portfolio exposure to the U.S. It has been a long and well-earned period of outperformance for U.S. stock markets relative to global peers. However, the drivers of U.S. equity performance – an accommodative Fed, a cheap currency and attractive valuations – no longer exist. Politics cannot materially change those factors either.
We also favour countries that are enlarging, not shrinking, their economic ecosystem. Asia, including China and India, are well-positioned to not only continue growing their middle classes but also to enhance regional trade linkage. Global exposures will be key to successful client outcomes.” – Tyler Mordy, President and CIO of Forstrong Global, the sub-advisor of Horizons Global Managed Opportunities ETF (HGM).
Forstrong also believes there is a strong possibility that Trump might actually be a catalyst for stronger growth in global equities, although their view is that the U.S. equity rally is likely slowing down.
As always, as a provider of 75 ETFs, we have solutions that work in a variety of market conditions. We’ve attached a number of commentaries from our sub-advisors that give their view on what’s going on and potential opportunities that investors can leverage during this historic event.
The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.