In the summer of 2016, Signature argued that markets were approaching a regime change. A multi-year deflationary impulse was fading and a reflationary turn was at hand. Commodity prices had stabilized and growth dynamics were improving along with financial conditions in the banking sector and credit markets. Populist political risks, exemplified by Brexit in late June, drove politicians worldwide to abandon austerity in favour of fiscal spending. Monetary policy alone was out of bullets but coupled with fiscal action would be potent. Growth would recover. We positioned for a rebound in inflation expectations and earnings and for trouble in the bond market.
On November 8, Donald Trump stepped on the regime change accelerator and his hair blew back in the reflationary wind.
An upsized stimulus and tax cutting agenda in the U.S. was greeted with exuberance by markets. Reflation became consensus overnight and global government bonds suffered a pounding into year end. The 10-year economic stagnation and decline in rates from 2006 to 2016 was potentially inflecting off the zero bound. That was Regime Change 1.0.
What are the investment implications from this point forward?
Our guide to this answer lies in the philosophical identity of the new administration which can be gleaned from the affiliations, experiences and writings of Trump’s appointees and advisors. We will present our detailed findings during the Digital Roadshow on January 24, 2017 (click here to register.) A brief summary is included below.
We believe the Trump administration could turn out to be Regime Change 2.0. The incoming administration intends to undertake nothing short of a regime change in American politics. The cabinet and agency nominations reflect the values of Trump and his campaign engineers – Kellyanne Conway and Stephen Bannon. All three of them bear allegiances to a deeply frustrated amalgamation of right-wing investors, businessmen, academics and media - people who supported them and whose deep ideological convictions will shape policy (with more influence than rustbelt voters.)
In our view, this constituency is plainly committed to the conservative principles of individual liberty, limited government and free markets. Naturally, they are determined to reverse President Obama’s leftist policies, for a start. The larger agenda is to dismantle the welfare state and heretofore unstoppable big government in America. Lobbyists and crony capitalism are despised by this group as much as statism; hence the call to “drain the swamp.” Only a set of Washington outsiders and businesspeople could execute this agenda.
It is our belief that national interest, individualism and free markets will be reset atop the power pyramid as globalism, altruism and central planning get jettisoned out the window. A guilt-free, self-interested policy platform will put America and the world on course for some turbulence as global institutions become unanchored.
However, do not despair. We believe that an economic boost from tax and regulatory relief is in store. Small business confidence in the U.S. surged in November by its largest amount since 1980 and employment will follow suit. Even without fiscal spending, wage gains should push interest rates higher. A stronger U.S. dollar is likely and the rebound in earnings will support equity outperformance. U.S. rates will continue upwards bringing losses in the bond market. Execution is in question for team Trump but the Republican backed policy actions alone support our continued pro-equity positioning call.
We look forward to hearing from clients and providing an in-depth outlook at our Digital Roadshow.
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 report 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.