Prepare for big deficits but not yet time for Trump and Dump

Character portrait of Donald Trump giving a speech on white backgroundBy Tyler Mordy, Forstrong Global Asset Management

Special to the Financial Independence Hub

Donald Trump has claimed the US presidency. While this may be another “unthinkable,” no one should be surprised. Rising populist sentiment has been a defining feature of the post-crisis world.

While a confluence of factors are driving discontent, an overriding theme is the perception that gains since 2008 have accrued to a wealthy few.  Trump successfully tapped into those views and won. Clearly, America has sent a message to the political elite: “you’re fired.”

Where to from here? Not to be denied is that market volatility is set to rise. Trump’s anti-trade rhetoric could particularly create instabilities and imperil prosperity. But in a globalized world defined by a move toward closer interconnectedness, the “biggest loser” would undoubtedly be the United States.

Trump and Dump? Not Yet

Volatility should also be viewed opportunistically. Our Investment Team has written extensively on “Trump proofing” client portfolios. The first line of defense is wide global diversification with exposures to longer-running megatrends. For example, commodities are stuck in a grinding sideways market. Politics cannot change that meaningfully.

We have already reduced portfolio exposures to the U.S. It has been a long and well-earned period of outperformance for US stock markets relative to global peers. However, the drivers of US equity performance — an accommodative Fed, a cheap currency and attractive valuations — no longer exist. Politics cannot materially change those factors either.

We also favour countries that are enlarging, not shrinking, their economic ecosystem. Asia, including China and India, is well-positioned not only to continue growing its middle classes but also to enhance regional trade linkage. Global exposures will be key to successful client outcomes.

Austerity is out, Deficits return

Finally, fiscal stimulus is back. Both Trump and Clinton were united on fiscal expansion, with a focus on upgrading the U.S.’s aging infrastructure. Yet the Republican sweep of Congress and the executive branch now removes political gridlock. And Trump has plenty of ammo to start spending. Debt-to-GDP has stabilized since 2011 and the deficit has come in dramatically. Gross government investment as a percentage of GDP is at a 70-year low. What’s more, lobby groups such as the American Society of Civil Engineers claim that US GDP could fall by $4 trillion between 2016 and 2025, due to lost sales and rising costs associated with bad infrastructure.

Pitching into the debate are the likes of Larry Summers and even Fed Vice Chair Stanley Fischer with arguments that fiscal largesse is the solution to concerns over “secular stagnation” (a phrase originally coined by Alvin Hansen in 1938 following the Great Depression).

 A comeback for fiscal stimulus

In Canada, the Liberal government was elected on a platform that placed austerity and balanced budgets on the back burner. More globally, fiscal stimulus is also making a comeback. For the first time in five years, more developed economies plan to loosen than tighten fiscal policy (16 countries for the former, while only nine for the latter). Expect this to be a multi-year trend.

The above developments will surely offset some of the broader uncertainty surrounding Trump’s policies. Big government deficits will initiate economic growth (read: borrow demand from the future). This is the main event. As such, clients are overweight global cyclicals, with an emphasis on non-resource exporting countries like Sweden and emerging Asia. We have also reduced bond exposures as government bond yields will finally start to edge back up.

Looking ahead, our investment outlook has not changed significantly. We continue to live in an era of new realities. Models that worked well in the past have lost their predictive significance (e.g. witness the huge miss for traditional polling agencies). New approaches are clearly needed to exploit heightened volatility. We are prepared and remain committed to active, global ETF portfolios to thrive in today’s atypical investment climate.

l1125964Tyler Mordy is president and Chief Investment Officer for Toronto-based Forstrong Global Asset Management. Since joining in 2003, Tyler has become a recognized innovator in the design and application of “global macro” ETF portfolios. He is widely quoted and interviewed by the financial media for his views on global investment strategy and ETF trends.  Recently, profiled Tyler as one of the “best and brightest” working in the ETF Strategist industry and described him as “a money manager for the modern era.” CNBC has also called Tyler one of the “best independent ETF experts.”

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