Last night’s election results remind me of the 1971 Monty Python album “And Now for Something Completely Different.” Donald Trump is president-elect of the United States.
The good news is that we have a clear winner with a clear mandate to “Make America Great Again.” Trump is the polar opposite candidate to President Obama. His election symbolizes the public’s frustration and determination to try something completely different, come what may. America’s middle class and blue collar Rust Belt are willing to run that risk, because whatever we’re doing now is not working for them.
The progression of the post-Lehman crisis sequence (from financial to economic to social to political) took an important step last night. The Washington consensus ideology (what we’re doing) and its establishment purveyors (who’s doing it) are being jettisoned. Their recipe for growth consisting of free trade and deregulated markets in a U.S.-led world order has failed to deliver on its promises lately. Key tenets of the ideology have fallen one by one in the aftermath of the financial crisis.
Clinton’s left-leaning centrist position was too closely associated with the traditional ideology to be considered anything other than more of the same. This opened the door for Mr. Trump, who became the political embodiment of this desire for something completely different. Fortunately for markets, change has emerged from the right under the Republican banner and not in a more deeply socialistic form along the lines of what Bernie Sanders had in mind. The “U.S. Brexit” appears to have a retained a pro-business element that may be lacking in what Theresa May has in store for the U.K.
In coming to this point, Trump has bred fear into race relations, gender relations, geopolitical relations and economic relations. The divisive campaign has alienated liberals and globalists but it is premature to judge the outcome of President Trump’s administration. Some patience and observation is advisable.
Things will change. Countries with large trade surpluses with the U.S. had better rebalance their economies. Think Germany, Japan, China. Persistent structural imbalances won’t be tolerated by a Trump administration. So those exporters have to rebalance toward domestic consumption, full stop. This will ruffle feathers but ultimately drive more localized production and President Trump will be able to point to new plants. Changes to trade relations within NAFTA are difficult to judge at this point.
Our overall view that stocks beat bonds remains intact. Elements of our “Regime Change” theme are reinforced and others are weakened as a result of Trump’s election. We are more convinced that cyclical inflation pressures will build due to tighter labour markets, stronger economic activity and higher trade barriers. Our recommendation to underweight government bonds stands. Meanwhile, credit and equity should perform reasonably well as earnings recover from their two-year downtrend. Commodities should escape intact given the infrastructure spending pattern common to new populist governments. The weakened element is emerging markets, whose trade dependency leaves them vulnerable to the deglobalization trend. This is a longer-term risk to growth.
The last point to make is that populist politics may only be just beginning. Europe is home to many disaffected voters who never supported globalization to begin with. As they go the polls over the next two years, we may face further growth-damaging political developments.
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This commentary may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.