• Stonewood AM

Trump and Beyond



To Our Clients

The dust is far from settled post the US election and the sun has still not set on 2016. A bizarre year has left many surprised by its events. The year started with the worst start in financial market history and has not disappointed to surprise since that point.

What has transpired?

Donald Trump was voted in as the 45th American President on Tuesday morning. This outcome to anyone outside of the US, and many inside of it, was not an expected outcome. This despite the polls reflecting a close race in Hillary Clinton’s favour prior to election. The root cause can probably be traced back to a sense of vulnerability post the 2008 global economic crisis, fuelled by insufficient growth, insufficient response to a loss of job security in an open global economy and recently a spill over from the instability in the Middle East, most notably a migration wave and the emergence of ISIS.

This is not the first surprise that investors have had to endure this year. Brexit is far from a distant memory and shares many similarities to the Trump victory. It too was not expected if the pre-election polls were to go by, these too were close, and therefore caught the market by surprise. Many are trying to scramble for some sort of clarity in order to conclude what the outcomes of these events may bring.

The reality is market have taught us that surprises are not as infrequent as we tend to believe. In fact history has taught us to expect surprises on a frequent basis. That is not to say we are any less surprised when events unfold, we are just not surprised that a unexpected event of some sort occurs.

The fact that both of these events are political in nature may also shed some light onto the rise of a populist and isolationist rhetoric that seems to be infiltrating western politics currently.

What this means for investors:

People don’t like uncertainty by definition and therefore often draw conclusions even when outcomes cannot be determined. It provides a false sense of security and control. We as a house always refrain from drawing conclusions with regard to what we would call “known unknowns.” We are confident that no one can actually truly comprehend the long term economic or market impact of either of these events. Not yet at the very least.

The impact of both of these surprises is likely to be felt only in the medium to long term both on their local economies as well as the effect it has on the global marketplace and asset prices.

The immediate impact of both events has been of interest to many market participants. Due to the nature of the surprises, markets on both occasions immediately reacted in a knee-jerk fashion to the downside, however as the news was digested markets retraced to pre-event levels and in the case of the Trump election proceeded even higher than the pre-election levels. The impact therefore on client portfolios has been far more muted than one would expect.

What is the Portfolio Manager reaction?

1st Fusion is a long term strategic asset allocation house. The core principle of risk management sits at the heart of our investment process. In order to minimize risk the funds always remains as widely diversified as possible across asset classes. Diversification is key to ensuring portfolios are able to withstand and prosper in many economic and market environments.

We as a result are continuously prepared for surprises through our wide set of assets included in the portfolio.

The outcome of recent events importantly has no impact on our mandates or the way in which we manage assets. The strategic nature of our fund diversification will continue to permeate throughout all investment portfolios that we manage. This will continue to ensure that our portfolios remain balanced in the way they are exposed to various risks and sources of return. We openly admit that we are likely to be surprised by market and political events going forward and therefore maintain a level of defensive preparation at all times.

What to expect going forward?

We are in what many economists have termed a “New Normal” economic environment. The general consensus has been that the world will need to rely on lower interest rates to stimulate positive yet mild economic growth for a long period to come. Evidence of this is the sheer volume of the global yields now trading in negative territory. Many economies have finally begun to show flickers of life for the first time since the crash of 2008. If the world economy was a patient in a hospital, it seemed to be out of I.C.U and was about to be discharged, but would need to undergo serious rehabilitation for years before it was back to full health. While some asset prices look high by historical perspectives, they are being supported by exceptionally low interest rates that are expected to persist longer term. This is a lower return world than we had become used to in previous decades, but there is still a premium to be earned on the more risky assets.

As 2016 draws to a close we look back on a year that has been more surprising than most. We remain convinced that our view of this uncertainty is best catered for via widely spread asset diversification and allocation.

We continue to thank all clients for their support. We are long term partners by definition with every single one of our clients and look forward to nurturing that relationship as the years go by.


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