In general, presidential cycles offer very weak actionable trends and have been overstated in terms of their predictive value for market returns. Additionally, the U.S. political system is designed in such a way that the president (especially with no Congressional support) can鈥檛 exert too much power at any given time. Still, compared to a more predictable Clinton administration, a Trump presidency would almost certainly initiate an increase in market volatility as investors adjust to a new regime. Yet the actual election outcome will not be as binary as markets are predicting.
Yes, there are polarizing ideological differences related to immigration reform, energy policy, and a variety of social issues. Trump鈥檚 nationalism could particularly imperil prosperity. Even Canada鈥檚 status as a privileged trading partner would be jeopardized should reforms take place (e.g., such as scrapping the NAFTA agreement). But in a globalized world defined by a move toward closer interconnectedness, the 鈥渂iggest loser鈥� would undoubtedly be the U.S.
Rising above the rhetoric and dueling polemics, however, there is one striking similarity: Both candidates support massive fiscal expansion. In yet another 鈥渘ew reality鈥� in the post-crisis world, the Republican nominee is actually pledging to spend at least twice as much as the Democrat on infrastructure. But bear in mind 鈥� both will wildly blow out the budget deficit. This is the main event.
Investment implications
Presidents aren鈥檛 unimportant. But they don鈥檛 dictate the innovation, work ethic, and creativity of businesses and consumers. Ultimately, big political events are almost never worth churning a portfolio over. Instead, our clients will always remain globally diversified with a tilt towards longer-running megatrends that are supported by positive fundamentals.
Today, that means reduced exposure to North America. For Canada, the overriding risk factor has been an ongoing commodity bear market. Politics 鈥� domestically or south of the border 鈥� cannot change that meaningfully. We have also rotated away from U.S. equities. It has been a long (and well-earned) period of outperformance. However, the drivers of U.S. equity performance 鈥� an accommodative Fed, a cheap currency, and attractive valuations 鈥� no longer exist.
Clients are also hedged against U.S. nationalism. Countries enlarging their economic ecosystem will benefit in either scenario. Asian equities, including China and India, are well represented in client portfolios.
Finally, a return of fiscal stimulus will initiate some economic growth (borrowing demand from the future). This is not a development isolated to the U.S. In Canada, the Liberal government was elected on a platform that placed austerity and balanced budgets on the back burner. Globally, more developed economies plan to loosen rather than tighten fiscal policy (16 countries for the former, while only 9 for the latter). As such, clients are overweight global cyclicals, with an emphasis on non-resource exporting countries like Sweden and emerging Asia. We have also reduced bond exposures as government bond yields will likely start to edge back up, albeit glacially.
Given the above positioning, our investment team continues to track a variety of different scenarios (including the outcome of the election) and remains prepared to shift strategies.
Courtesy Fundata Canada Inc. 漏 2016. , is President and CIO of Forstrong Global Asset Management Inc. Securities mentioned are not guaranteed and carry risk of loss. This article is not intended as personalized investment advice.
