Fear, greed and the Trump factor

What would happen if Donald Trump did become president?

When an attendee at the Glacier International Navigate Seminar posed this question, the audience burst out laughing. Many people still shake their heads in disbelief that the billionaire businessman whose controversial policy statements often land him in hot water could be running for president.

But how does the US presidential election impact US and other international markets?

Addressing these questions, Kevin Johnson, vice president for Dodge & Cox in San Francisco, said he too was still scratching his head to understand how they got where they are.

It feels a lot like a reality show and if Donald Trump does win the show, it would create all sorts of issues, he said.

Looking at the underlying fundamental data and statistics in the polls, Trump’s supporter base is relatively narrow across the broader US population, but while he didn’t believe that Trump could win the Republican nomination six months ago, it now looks like a possibility, Johnson said.

While there seems to be a low probability that he could win the general election, “stranger things have happened”, he said.

“From our perspective, from an investment outlook, we don’t think the actual political environment and who is in power in terms of the White House is the key issue. It is really much more about how is the economy doing.”

Johnson said a number of studies have shown that the best predictor of the outcome of a presidential election in the US is the shape of the economy three to six months before the election. If the economy is doing relatively well three to six months before the election, the incumbent party has typically held office. If the economy is struggling during that period, the other party has typically won.

“That makes sense in that people want change if they feel the economy is not doing relatively well.”

Johnson said if he had to guess he would probably surmise that that relationship would continue during the upcoming election.

“But we think really the economic fundamentals are much more important to the investment prospects than the actual candidate.”

James Brown, a vice president at BlackRock based in New York, said the US presidential election hasn’t had too much impact on markets yet, as people have discounted most of the news.

However, when Democratic presidential hopeful Hillary Clinton first released tweets critical of healthcare pricing and price gouging and vowed to take it on, BlackRock’s healthcare holdings “suffered somewhat”, he said.

But even though politicians might make a lot of noise in the media, the political process and structure that is in place would almost make it impossible for these sorts of policies to get pushed through, Brown added.

He expects to see volatility and a lot of “noise” until the presidential election.

“I think the journey is going to be a lot worse than the destination and there is little chance I would say that any of these quite outlandish policies will actually get put through into practice,” Brown said.

Mike Soekoe, director at Foord, said while the underlying economies are doing fairly well, there are a lot of worries about the US election. Other issues such as Brexit have also occupied headlines.

They believe the US economy is doing well, Europe satisfactory and while growth in China is slowing, it is still growing.

Soekoe said this should be a good environment for equities and for markets, but the noise was preventing the market from improving.

While healthcare stocks in the US have received fairly bad knocks, they have taken advantage of the sell-off and bought more stocks.

“On a ten- to 20-year view we really like the sector. So when you get comments like that, and the shares get sold off, we use that as a buying opportunity,” Soekoe said.

It is important to look through the noise and to take a much longer-term view, he added.

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