Investment Tips
31/01/2020
How to Deal with Donald Trump as an Investor (or any Political Leader) - Morningstar

Key Takeaways

  • Political instability can be difficult to deal with—but especially when our political leaders are in hot water. 
  • In today’s context, politics may seem as important as ever, with an abundance of noise creating many questions for investors.
  • In the face of such uncertainty, it is normal to question whether you should sell, hold or buy. To our eye, the answer is simple… manage risks, stay informed and—if in doubt—stay the course.


Donald Trump and Investing

Investors are often quick to link political progress (or a lack thereof) with investment success. That is, we believe in the power of a leader, including their ability to impact business. But the link is not always so straight forward, as we’re finding out with Donald Trump—heralding his ability to influence a rising market despite continued uncertainty and even the odd negative surprise.

Chief among the many problems related to political forecasting is the temptation to react too quickly or with too much confidence in the lead up to major trigger points. Whether that be an election, a trade war deadline, or an impeachment inquiry, it is important to identify the difference between political developments and investment impact.

Perhaps the biggest challenge is that you must get two things right: 1) you must guess the outcome of the next political ‘episode’, and 2) you must guess the market participant reaction to that outcome. We’d caution that this is extremely difficult way to make money and an unreliable path to riches. If you are cynical of this stance, we share the below quotes from the last U.S. election and Brexit referendum, where even the smartest of people got it grossly wrong.

Incorrect U.S. Election Predictions (U.S. stocks rallied 2.22% on the day after the election and around 9% in the three months following)

Edited Trump Clinton 2


“We would expect a small global stock market rally if Clinton wins (about 2 percent) and a large decline if Trump wins (about 10 percent)”.
Eric Zitzewitz, Professor of Economics at Dartmouth College.

“The S&P 500 will fall by 3% to 5% immediately if Trump is elected”. Tobias Levkovich, Citigroup's chief U.S. equity analyst.

“If investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.” Simon Johnson, professor at MIT Sloan and former chief economist of the IMF.


Incorrect Brexit Referendum Predictions (U.K. stocks fell 3.15% the day after the referendum but gained around 13% in the six months following. Economic growth has also continued to rise).

Brexit

“A vote to leave would tip our economy into year-long recession with at least 500,000 UK jobs lost”. George Osborne, served as Chancellor of the Exchequer under Prime Minister David Cameron.

“Leaving Europe would tip the country into recession”. David Cameron, ex-Prime Minister UK.

“Brexit would trigger recession”, predicted -0.3% GDP for Q3”. IMF Forecasts.

“Short term impact of -1.25% GDP”. OECD Forecasts.

“It would be likely to have a negative impact in the short term… I certainly think that would increase the risk of recession”. Mark Carney, Bank of England.

So, yes, we are in uncharted waters—politically and economically—but it’s important to remember that political uncertainty is nothing new. On this occasion, as in the past, people will jump over themselves to tell you the “right way”. Whether we are judging the merits of political candidates or working through our investment positioning, we must choose research over reaction and urge all our clients to do the same.

Political biases aside, it is always easy to build an ugly bear case—no matter which scenario you look at—and we are mindful that the media often take full advantage of fear-driven sentiment. We therefore encourage investors to keep a level head, and while these issues always have substance, investors should look through media exaggeration as political risk is often unpredictable.

Bringing this into a portfolio context, it is for circumstances like this that we take a diversified approach when managing money for clients. We don’t go “all in” on a given outcome, because we can limit the risks by spreading an investor’s eggs across multiple baskets. We position portfolios so they have global exposure, defensive exposure and different currencies, to name a few, which all help buffer against any political catalysts.

Last, we leave you with a few key points.

  • Remember, the answer to political instability is often simple… manage risks, stay informed and—if in doubt—stay the course.
  • Any turbulence in markets may create great opportunities to purchase assets that will add meaningfully to returns in the future. We are not there yet, but we should look at this opportunistically.

 


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