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Playing the Trump card

A week is a long time in politics, so what is year-and-a-half? In the span of a lifetime, this could be an insignificant period. In US politics, it was a full 180-degree turn. Many are still struggling with the new reality, following the unexpected result of the presidential election of November 2016 and the inauguration of President Donald Trump in January 2017. The implications which outreach the political and social sphere, go deep into reshaping the investment landscape for the moment, and possibly for years to come.

In order to be able to evaluate this presidency, we need to filter the signals from the noise. This is because President Trump, more often than not, sends conflicting messages. Looking at the raft of issued communication to date, it is clear that there are separate lines, from the presidency and the Republican Party establishment. It has become the norm for these two to contradict each other. We can also observe a struggle between the presidency and the main organs of the US state. This is witnessed in the clashes of the presidency with the judiciary, the Federal Bureau of Investigation and major players within his same administration.

In the midst of all these conflicting signals, we need to understand the mindset of President Trump, and what he stands for. Prior to his election many commented that he lacks a level of understanding of international trade and foreign policy in general. What is for sure is that he has been rewriting the way the presidency communicates to its own organs and the wider public, through the early morning fiery Twitter rants to political pundits, scrambling to make sense of the President’s words, in most cases struggling to defend untenable stances and positions.

To date, the economic outcomes suggest that there has never been a period when US corporations were as strong as today. This is shown in the strong corporate earnings figures and solid base economic indicators, including consumer price indices and domestic product growth.

Some argue that this is a spillover effect from the previous Obama policies. This cannot be all true and some credit must be attributed to President Trump. We have to acknowledge the economic impact, as the repeal of the Frank-Dodd Act (which reduces President Obama era restrictions on the banking sector), the overhaul of the US tax system (providing large deductions to corporations and wealthy individuals), increasing the military spending  and international trade sanction – have all boosted the US economy in the interim, despite their adverse potential long-term effects.

The major equity indices in the US and demand for dollar have strengthened once again, despite the dollar’s sharp fall in 2017. The argument that the US is renouncing its role in global leadership may be true to some extent, however it remains, maybe unwillingly, the world’s global superpower for decades to come.

On the other hand, the rifts with international trading partners and isolationist approach do not bode well for the future. The current positive data points mask major negative shifts impacting the US citizens, such as reduction in the allocation towards medicare and the possible backlash from retaliatory trade measure from US trade partners.

From the eyes of our local investor, there is no denying that investing today carries a greater risk,  given the positive performance of most major equity indices and the stability in the bond markets for a number of years. In today’s circumstances, how may one invest in a manner to reduce the inherent risks of the current political climate?

Investing in local securities has always been a recommended option. The local economy, despite our increased global interconnections, remains somewhat disjointed from global markets. This is because most of the listed securities are mainly exposed to the local economy – with a few exceptions.

The economic outcomes suggest that there has never been a period when US corporations were as strong as today

This provides our investors with investment returns which are uncorrelated to foreign markets. Having said this, investors should stay away from a portfolio which is fully invested in local securities. Despite all the advantages, risks still exist. One major risk is concentration risk.

There is no magic formula in determining how much of your portfolio should be invested in the local market, however, Maltese investors’ home bias remains strong – this is common across the globe as investors can relate to local companies more than they do with foreign entitles.

Looking at the returns generated over the previous year, we see that global equity markets have rallied overall, while local equities remained relatively unchanged, closing slightly in the red. Local sovereigns have declined in their value in line with their European peers, as the quantitative easing spree of the last four years starts coming to its final stages. In the corporate bond market, demand has increased as the need for yield remains strong.

When deciding on how to invest abroad, the decision becomes more difficult. Investors need to appreciate that our local market is limited in its size and possibilities in meeting our needs. Today it is clearer that we need to take the topic of diversification to  new levels. This is to ensure protection of our capital and income in the midst of the current changes and the long-term changes yet to come.

To achieve adequate portfolio protection through diversification, investors need to understand the sources that provide the diversification in the first place. For example, diversification by investing in bonds of corporations that operate in one industry, fails to protect the investor’s portfolio. Therefore, to take diversification to the next level, investors must ensure that their portfolios are exposed to different asset classes, industries and geographies.

In addition, we envisage an increase in the importance of active asset management following the rise of passive strategies in the recent years, propelled by the elongated period of financial bellwether. Active asset management could provide the edge required over passive strategies, to interpret this changing market environment and reallocate underlying assets accordingly. This is a risk that passive strategies are ill-prepared for. We can no longer expect the strategies that functioned in the past decade or so to take us into the future. This could surely be the time to at least own both passive and active funds.

This requires investors to be prepared and implement the necessary changes to their portfolios, to reflect the needs of this new investment era. Together with your financial adviser, you need to determine the appropriate investment strategies, while keeping in mind that you need to play the Trump card.

This article was prepared by Daniel Gauci HnD Management, CeFa Investments, an investment adviser at Jesmond Mizzi Financial Advisors Ltd. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on tel: 2122 4410, or send an e-mail to daniel.gauci@jesmondmizzi.com.

www.jesmondmizzi.com

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