{"id":58185,"date":"2016-11-21T00:31:18","date_gmt":"2016-11-20T23:31:18","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/trumpflation-what-now-for-investors\/"},"modified":"2019-12-31T01:16:00","modified_gmt":"2019-12-31T00:16:00","slug":"trumpflation-what-now-for-investors","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/trumpflation-what-now-for-investors\/","title":{"rendered":"Trumpflation : what now for investors?"},"content":{"rendered":"

It\u2019s only the beginning of the process and, like the Brexit vote, nothing has yet been set in motion
\nfrom a policy standpoint. We were operating on the basis of \u2018known unknowns\u2019 and we are now
\nmoving to new ones. Nevertheless, the difference is that after the initial disturbance of the Brexit
\nvote the result was local, while this shock is global and has wider ramifications. <\/p>\n

It Has Been a Long Week \u2013 I\u2019m Feeling TIPSY<\/h2>\n

A surprise outcome and a full Congress sweep for the Republicans mean that President-elect Donald Trump is more likely to deliver on some of his promises, starting with fiscal stimulus.<\/p>\n

Inflation Take<\/strong><\/p>\n

After the overnight sell-off of break-evens (or inflation expectations) in sympathy with S&P500
\nFutures, break-evens rallied strongly on 9 November (Figure 1). As we wrote in early November,
\ninflation is coming back, not roaring for sure, but it has pushed higher as 2015\u2019s oil price declines are
\ndisappearing from the year-on-year figures. The move on 9 November pushed break-evens above
\nthe 2% non-binding inflation target of the US Federal Reserve.<\/p>\n

We believe inflationary risk is more centred on the US than the Euro market currently, and investors
\nmay want to look at treasury inflation-protected exposures (TIPs).<\/p>\n

\"figure_1_-_5y-5y_forward_us_break-even_inflation.jpg\"<\/a><\/p>\n

US Curve Implications: 2016 Reset<\/strong><\/p>\n

Implications for the US Treasury curve are yet to completely unfold, but are clearly impacted by the
\npotential inflationary policies. The longer end of the curve has steepened sharply since the election
\noutcome, with yields reaching 2.12% intraday on 10 November from 1.85% two days before.<\/p>\n

Will this rebound above the 2% mark make it attractive for international investors to find longerterm
\nentry points? As with every sharp move, it may be wise to let the dust settle. Nevertheless,
\nwith so much uncertainty, the sell-off may be limited, offering opportunities to position on steeper
\nparts of the curves while managing duration risk.<\/p>\n

\"figure_2_-_us_treasury_spread.jpg\"<\/a><\/p>\n

Within nominal bonds, positioning on the steeper part of the curve \u2013 with either 5-7 or 7-10 year US
\nTreasuries \u2013 would be an option. Meanwhile, as credit spreads remained well behaved and in line
\nwith the risk-on rotation, the 3-10 year part of the curve continues to be an area to analyse for a
\ncontrolled carry and roll strategy.<\/p>\n

Playing it with Sectors<\/h2>\n

Sector investing has become more popular, as highlighted during the recent SPDR Sector
\nRoadshows, and investors immediately wanted to pick between the sectors on the Trump news. This
\nis what we\u2019ve seen so far, with Health Care benefiting the most, as the market re-priced the discount
\nin the sector that was based on a Clinton win. Beyond this initial move the sectors that bode well for
\nan environment of fiscal expansion and reflation are Materials, Energy and Financials.<\/p>\n

\"figure_3_-_sector_performance_during_election_week.jpg\"<\/a><\/p>\n

Materials<\/strong> are benefiting and should continue to do so, based on an increasing commodity price
\noutlook and a pick-up in analysts\u2019 earnings upgrades. The sector tends to pass through price
\nincreases, which is ideal in an inflationary environment.<\/p>\n

The Energy<\/strong> sector has benefited from improved crude oil prices and industry self-help measures.
\nSpending discipline has led to more astute investment decisions and fewer projects coming onstream;
\nboth these effects will help the oil market to come into balance with a better cost structure.<\/p>\n

Within Financials<\/strong>, the funding and asset position of the banks are rate sensitive, and this slight
\nsteepening of the curve in the US benefits the sector. The banks have cut expenses aggressively in
\nline with falling net interest margins whilst building up capital; this has led to high leverage to
\nincreased interest rates, which could improve profitability.<\/p>\n

Being Smart About Our Beta<\/h2>\n

Going into the US Presidential Election, many investors had taken their bets off of the table and
\nreduced equity exposure. The resulting cash balances are destined to come back into the market,
\nand we have already seen significant flows into equities just over a couple of days.<\/p>\n

The simplest way for investors to buy equity exposure remains via basic beta funds.
\nOur preference
\nin US equities is outside of the mega caps. In particular, those with large overweight positions in
\nIndustrials versus the S&P 500 breakdown, and also attractive exposure to domestic earners.<\/quote><\/p>\n

Meanwhile, Smart Beta investing has been an enduring trend in recent years, and demand for
\nstrategies that do not rely on market capitalisation weighting, but focus on factors instead, should
\ncontinue unabated despite the change of US political leadership.<\/p>\n

Smart Beta investing offers a rules-based, transparent methodology that is reassuring in turbulent
\nmarkets. On the whole, factors have shown better risk-adjusted returns over the long term, and in
\nmany cases offer downside protection and lower volatility. Factors will remain drivers in the highly
\ncorrelated markets that investors are witnessing now.<\/p>\n

US rate expectations are not remarkably different from before the Trump victory, with high
\nprobability of a Fed hike in December and another one or two rises next year, but no change to
\nassumptions that globally the environment is still lower for longer. The search for sustainable
\nincome will persist.<\/p>\n

Multi-factor strategies have been increasing in popularity, especially those with a \u2018balanced yield\u2019,
\noffering Quality and Yield as well as an element of Lower Volatility.