Canadian investors may not actually have to do a whole lot with this news
Ryan Modesto | November 10, 2016 | 5i Research: Whether or not you are a fan of the result, Donald Trump has managed to defy pollsters, pundits and the media every step of the way over the 2016 presidential election campaign.
Even going into election day, estimates for a Clinton win were in the 60% to 90% range depending on the source with the key being that no one was really expecting a Trump win. We think this leads to some interesting implications that may get overlooked, above and beyond the more polarizing talking points individuals are likely to come across over the next few weeks. Here are a few early takeaways we think may get talked about less in the early stages:
Don’t trust polls anymore
This is a point worth noting that will likely be overlooked initially. Between the Brexit upset and now this, we think markets will begin to view any attempts at predicting voting outcomes such as this as useless. In both cases of Brexit and the election, there was a fair degree of certainty that the opposite result was what would occur. So polls are wrong, who cares? Where it may become important is that it could lead to increased volatility with the lead up to any future events of a similar nature across the world. Typically, markets look to these types of predictive processes to get a read on ‘how things will turn out’ and then market prices adjust to these expectations. With no trust being given to these polls any longer, it will only create a void of uncertainty, as any result is now a toss-up. This could mean that as certain events draw closer, investors simply decide to hold cash and avoid the uncertainty.
Interest rates may not rise in December
Earlier this month, an interest rate increase from the US FED was looking like a near certainty. With this recent election result, however, things have quickly become less certain. The FED has had a tendency to react to movements in the markets and with uncertainty in what policies a Trump presidency will use; the FED may deem it prudent to hold off on any action until there is more clarity on the path forward. Looking longer-term though, Donald Trump has indicated a dislike for current FED policies so there could be political pressure on the current FED to increase rates sooner or faster than initially planned. If the current FED does not oblige, there is potential that new players are given seats that empathize more with the views of Trump. Yes, the FED is supposed to work separate from the government, but theory and reality are not always the same. Some of this impact can already be seen in US bank stocks.
Don’t think it cant happen in Canada
Citizens across the world are clearly opting for change. It happened in the United Kingdom, it happened in the United States and we think it would be inappropriate to think that it cannot happen in Canada either. What’s a bit more worrisome is that both of these instances have seemed to provide a case that a polarizing campaign/platform has a chance of getting someone into office. There could be a good chance that this strategy is being eyed closely in Canada on a provincial and federal level. There are no investment implications here (yet) but there could be and the more the Canadian economy sputters, we would think the more likely this type of scenario could arise and we would bet politicians on all sides are considering how to use or defend against these types of scenarios.
Canadian Investors may not actually have to do a whole lot with this news
With these types of events, investors are often compelled to do ‘something’. However, given the natural composition of the Canadian economy, it may actually act as a bit of a natural hedge to the events of the US. Since capital often flows into assets such as precious metals in times of uncertainty, Canadian markets may see a bit of a lift as the gold producers benefit from higher prices. A lot of the pipelines and financials may also see some demand as they are typically viewed as more defensive in nature with the help of their distributions. There are likely some longer-term trade implications between Canada and the US (as seen in declines in the lumber sector and auto sector), but attempting to position against something like this at this stage would largely be speculation.
As always, the key in our view is a long-term mindset and diversification across assets, geographies and industries. There is added uncertainty currently but the best defense is often prudent portfolio management and not reacting to the news item of the day.
We hope to add a blog on industries and companies to consider given these developments so don’t forget to sign up for the blog below to ensure you are notified when it is up.
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About the author: Ryan Modesto, CFA is a Managing Partner at 5i Research and has worked in high-net-worth portfolio management at one of Canada’s largest banks.
Read the full article at: www.5iresearch.ca
