But don’t despair: some sectors may benefit from his victory, says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri. His firm manages the Renaissance U.S. Equity Income Fund.
“The election of Donald Trump was another sign that the political movement of populism is being embraced worldwide,” Hardy adds. “Whether that’s Brexit or Trump’s election, there’s a lot of uncertainty, [which] is leading to a high level of volatility worldwide.” (As New York Times reports, populism is being driven by factors including fear of social change and crisis of identity.)
Still, says Hardy, “there are net beneficiaries potentially of [the] Trump victory.” He cites catalysts such as less regulation and potential greater defence spending, as well as changes in healthcare policy. “Those sectors could be beneficiaries,” he predicts.
But, he warns, “there are certain impediments to economic growth that could occur due to changes in immigration policies or trade policy. And, there are no certainties right now, given where we are one day after the election.”
The best approach, he says, is to continue seeking the best risk-return scenarios. Hardy’s looking for “companies that are selling most attractively versus their fair value and downside value.”
He adds, “What you saw initially was a sell-off of both equities and the U.S. dollar and commodities. Gold rallied and certain currencies rallied versus the U.S. dollar, but [those effects] have abated.” Yet, says Hardy, “uncertainty will persist until candidate Trump [officially] becomes president Trump.”
Before and after the election
“Going into [the U.S. election], we were overweight energy, had a healthy weighting in financials, and we were overweight healthcare,” says Hardy. The good news is “all of those sectors have seen a positive response to Trump’s election, and part of that is by virtue of the perceived changes in policy towards regulation.”
Further, yields on 10-year Treasurys had risen by about 10 basis points as of 10:30am on November 9th. Hardy adds, “Other sectors—such as more interest-sensitive sectors like utilities, real estate and even consumer staples—had sold off. But a lot of that is due to interest rate sensitivity.”
As of 11:45 am on November 9th, CME’s FedWatch tool found there was a 66.8% chance that the U.S. Federal Reserve would raise rates in December. That compares to a 76.3% chance on November 8th.
Says Hardy, “A lot of attention is paid to the election, [but] it’s ultimately economic growth and interest rates that will affect asset prices, whether that’s stocks, bonds or real estate. So, a perceived change in interest rates [is] really what’s going to impact these in the near and long term. [If those areas are impacted], we could remove weight.”
When it comes to healthcare, he adds, the sector is a mixed bag, “with certain beneficiaries like drug companies potentially [coming out on top], depending on whether we see policy changes towards the Affordable Care Act impacting facility or diagnostic companies.
“Our preference is for those large pharma or medical device companies, and that shouldn’t change. Within financials, banks are attractive […] and an increase in interest rates would benefit the banks.”
Value versus growth
The value versus growth dynamic has abated somewhat since the second quarter, says Hardy. Right now, the “environment is one of volatility and muted growth.”
Further, even though earnings growth has gone from negative to slightly positive in that time (from -4% to +1%), “we aren’t seeing high levels of growth,” says Hardy. “Our strategy is to identify companies that are selling at a discount, [and those] should continue to be rewarded. But rising interest rates do present a headwind to certain sectors in the value market, particularly utilities, REITs and consumer staples.”
The dividend yields of companies in those sectors have added to their attractiveness, he adds, “so changes in rates are impacting those sectors more adversely here in the short term.”