Investing under Trump
Markets trumpet new Trump era, but details remain elusive

Big investors agree his victory will usher in a new era, but there agreement ends

by: Robin Wigglesworth

Sometimes the end of an era comes imperceptibly, with it only becoming apparent long after the fact. But many investors are in little doubt that Donald Trump’s election victory loudly trumpets that an entirely new market regime is nigh.

The subsequent shockwaves — which sent equities powering higher on stimulus hopes, bonds crashing on inflation fears and emerging markets quaking — has upended the calm that blanketed markets for most of the year and triggered a rash of obituaries for the three-decade bond bull market.

Ray Dalio, the founder of the $150bn hedge fund Bridgewater, argued this week that “there is a good chance that we are at one of those major reversals that last a decade”, similar to the outbreak of stagflation in the 1970s or the shift back to strong, non-inflationary growth in the 1980s. Although Mr Dalio stressed that the new epoch might be very different from the 1970s and 80s, he warned that “there’s a significant likelihood that we have made the 30-year top in bond prices”.

For financial markets, the period since the US presidential election has at times recalled the “Ten Days That Shocked the World”, the account of the Russian Revolution written by the journalist John Reed shortly before he died in 1920. Trades that have worked for years suddenly unravelled, while old dogs became sleek greyhounds overnight.

Take government bonds. The supercharged reach for yield stoked by negative interest rates and quantitative easing in Europe and Japan had spurred investors to gobble up any long-maturity, higher-yeilding debts they could find, encouraging a spate of “ultra-long” bond issuance by opportunistic finance ministry officials. The buying frenzy helped long-dated Japanese, eurozone and US government bonds to returns of roughly 10 per cent in the year to November.

Those officials must now be marvelling at their timing. Austria’s 70-year bond, issued late last month, has lost almost 6 per cent of its value since the US election. Italy's 50-year bond sold at the beginning of October, has shed nearly 5 per cent over the past 10 days. Long-dated Treasuries have capitulated, wiping 6 per cent from their value. For supposedly safe assets, these are steep losses.

A similar reversal has played out in stock markets. The FTSE Emerging index of developing world equities gained more than 15 per cent in the year to November, but has tumbled 6.6 per cent this month on concerns of a stronger dollar and trade wars under president Mr Trump. US financial stocks have flatlined for much of 2016, but rocketed more than 10 per cent this month, while old favourites such as utilities and real estate have sagged.

The sense of a fin de siècle was echoed in Bill Gross’s latest letter to investors, which predicted in typically florid fashion that “the Wall Street, finance-led hegemon is fading. The Populist sunrise has barely broken the horizon”.

“Global populism is the wave of the future, but it has taken a wrong turn in America. Investors must drive with caution, understanding that higher deficits resulting from lower taxes raise interest rates and inflation,” the Janus Capital fund manager wrote.

Still, some investors caution that it is too soon to conclude that Mr Trump’s election signals the end of a market era often dubbed “the new normal”. Michael Roberge, co-chief executive and chief investment officer at MFS, the firm that invented the mutual fund, argues that only the Federal Reserve has the power to decisively usher in a new phase.

“The big potential change is in monetary policy. If a big enough stimulus package gets passed, and if the Fed then acts more aggressively to halt inflation, then that would be a regime change. But there are a lot of ‘ifs’ there,” he points out.

Passing a big stimulus package may prove trickier than markets expect. Goldman Sachs analysts this week said that there was a $12tn chasm between the budget implied by Mr Trump’s policies and the more austere spending plan of Congressional Republicans.

“We believe there is substantial support in Congress for proposals to cut taxes and reform the tax code and that there is likely to be sufficient support to enact a modest infrastructure package, perhaps combined with tax reform. However, our impression is that market expectations of quick fiscal expansion may be running ahead of political and legislative realities,” Goldman analyst Alec Phillips wrote.

Jeffrey Gundlach, the head of DoubleLine Capital and one of the few fund managers who predicted Mr Trump would capture the White House, also cautioned that investors are over-analysing the outcome of the election. “There is a lot of money moving around and it’s too early to divine what the tea leaves mean,” he said on a conference call this week. “I don’t think yields will go much higher in the short term.”

Nonetheless, the bond fund manager argued that one of the most lucrative equity trades of the past few years is now over. The so-called Fang stocks — tech giants Facebook, Amazon, Netflix and Google — collectively gained nearly 60 per cent last year, and at their peak added another 17 per cent this year. But since the October 24 peak they have tumbled by nearly 10 per cent as investors rotated into more Trump-friendly sectors.

Mr Gundlach argues these stocks benefited inordinately from the previous market regime, and predicted that more pain was coming to these once red-hot stocks. “I strongly advise people to stay away from the [Fangs] in a big way,” he said.

Additional reporting by Eric Platt