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Trump wins presidency

09 Nov 2016

Company statement

Our thoughts on the US election results

While “US Politics” is listed as a potential negative driver on our theme score list, it carried a fairly low rating in terms of potential impact since we did not discount a Trump victory.As it is, we are very hesitant to base our interest rate view and strategy on political outcomes given the potential binary nature of these events.

Nonetheless, our funds are currently run with an underweight position in nominal bonds as well as modified duration with the latter at 70% of our maximum allowable mandate limits. As a result our funds are in a positon to weather a rand and bond sell-off relatively well should a global risk-off trade gain momentum in lieu of potential market uncertainty linked to the Trump victory.

Our current defensive position is mostly the result of growing concern about the impact of long-running unprecedented monetary policies by developed economies on global bond markets; i.e. global bond risk distortion. The large foreign investor exposure to local currency government bonds (38% of total or more than R0.5 trillion) following the scramble into higher-yielding assets has now become a hurdle in our minds. 

Like Brexit, the Trump victory points to a global migration towards a more populist and protectionist type of governance. This is potentially bond negative as it increases both geopolitical risk and policy uncertainty. One of our key themes gaining traction is a change in the global policy mix with a shift towards increased fiscal expenditure. This is more likely now given the Trump victory and his campaign promises for increased infrastructural spending. Again, this would be bond negative and points to a steeper US yield curve.

While we would refrain from responding to the initial market reaction, we would carefully consider buying opportunities should bond yields rise significantly.