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Donald Trump has been elected the 45th president of the United States, against all expectations. Just a few weeks ago, his quest for the White House was given little chance of success.

This victory reflects the American people’s desire for change and is related to the populist movement which has risen up against the political establishment and which was instrumental in the Brexit vote. This movement could spread throughout Europe in 2017, with many presidential elections slated to be held, including in France and Germany.

What caused this reversal, when most pundits were betting against Donald Trump? Candidate Trump was seen as an “independent,” because his approach differs in all respects from that of a traditional politician. Since the Republicans won not only the presidency but also a majority in the Senate and in the House of Representatives, we can expect this legislative branch to keep the new president in check to some degree.

Market reactions

The evening of November 8, as the results came in and increased the likelihood of a Trump victory, the Dow Jones futures were down 800 points. However, when the U.S. markets opened on November 9, the declines were much smaller, and by afternoon the Dow and the S&P 500 were both up.

What’s in store in the coming months?

After a strong initial reaction, the markets should stabilize. After all, Donald Trump’s policies are viewed as favourable for U.S. economic growth: lower taxes, infrastructure spending, less government regulation and intervention, abolition of Obamacare.

However, other factors could generate market uncertainty:

  • Trump’s proposed policies on immigration and trade could jeopardize global growth.
  • The increase in the deficit and the debt resulting from his spending program could derail the economic recovery.
  • The policy changes being considered by the head of the U.S. Federal Reserve could increase volatility.
  • Yields on U.S. Treasuries of more than 10 years have risen, which could suggest a perception of greater risk, or an adjustment in inflation expectations.

The Financial’s reaction to the election

We believe it’s important not to panic and to avoid reacting too hastily. The events in the wake of Brexit offer a good example of what we can expect in a political situation like this. The financial markets always end up reacting to economic fundamentals. We had already reduced the risk in the portfolios over the past few weeks in anticipation of a higher likelihood of a Donald Trump victory. We are going to reassess our strategy in light of the latest developments. We want to make sure that we understand the issues and that we properly assess the investment opportunities.

What we’re doing to manage risk and volatility

/ Before the elections, the Financial’s Investment team reduced the risk of the FDP Tactical Asset Allocation Private Portfolio1 by bringing the 15% equity overweighting back to a neutral position. Reducing the equity weighting protects the portfolio because securities are most likely to be affected by recent fluctuations. We also reduced the spread between the duration of the fixed-income component of the portfolio and the index.

/ Apart from the asset allocation strategy, which can be used to manage risk, our managers build their portfolios according to a rigorous security selection process, which enables them to take advantage of opportunities created by events like Brexit or the U.S. elections. Our managers focus on quality securities whose income predictability and cash flows allow them to outperform the market over a cycle.

Some of these managers have global mandates, where security selection is prioritized. In addition, many U.S. companies in the S&P 500 operate internationally and generate sales worldwide. While these firms may be affected by U.S. policies, they can be equally impacted by other global events in regions where they do business.

/ We should point out that all Professionals’ Financial managers and investment products are chosen for their ability to weather periods of high volatility. These products have enviable characteristics:

  • Less return volatility than the benchmark indices
  • Betabelow 1
  • Favourable bear market capture

/ Many of our portfolios are composed of two complementary products whose characteristics and strategies are different but which, together, allow for better risk management.

In conclusion

At the Financial, financial and political risks are integrated into our management process. The rise of populism is probably one of the major problems now facing global economies. This wave of populism could impact international trade and have repercussions on global economic growth.

Regardless of who is in power, quality U.S. companies will continue to generate cash flows, and the upheaval caused by the elections may create attractive opportunities. What you should bear in mind, as an investor, is the importance of sticking to your investment policy, as defined according to your investor profile, and avoiding hasty or rash decisions concerning your investment portfolio. If you have any questions or concerns about the current situation, please contact your Wealth Management Advisor.

 

1 Fund available in Private Portfolio Management and Private Securities Management which is used to manage risk.

2 Indicator measuring the level of systematic risk of a given security by quantifying the correlation between the return of the security and that of the market, or between the volatility of the security and that of the market. A beta coefficient of 1 indicates that a security has an average level of risk because its price changes on average are equivalent to those of the market. A beta coefficient above 1 indicates that a security is more volatile than the market as a whole and has a higher level of risk, while a beta coefficient below 1 indicates that a security tends to fluctuate less than the market as a whole. 

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