US election reaction: will Europe be next?
Tim Stevenson, Director of European Equities at Henderson Global Investors gives his reaction to Trump’s anti-establishment victory, and the implications for European equity investors
So, a Trump victory. Once again over-turning the ‘accepted wisdom’ that ‘The Establishment’ would win. This is a message that politicians are out of touch with the huge groundswell of opinion that the ‘system’ is not working for them. The implications for Europe are widespread.
Positives: Europeans (certainly Europe ex-UK) tend to be much more ‘Social Democratic’ or more egalitarian than in the US. The extent of the voter dissatisfaction is therefore not necessarily as great.
Equity valuations are on the whole lower in Europe, and investors have broadly reduced their European exposure year to date.
Negatives: Trump is against ‘Globalisation’ and ‘Open Trade’. Europe thrives on free trade (as does the world, arguably).
Trump may well use protectionism against many European companies.
Cancelling Obamacare throws the whole reform of healthcare back up in the air.
Anything with high sales to Mexico will immediately be given a lower valuation.
Unemployment is higher in many parts of Europe than in the USA, and therefore the degree of anger with the establishment has the potential to be as great, if not greater. Politicians badly need to address this issue before a “Radical” comes up with a set of easy slogans that win over the electorate, regardless of the ability to implement or finance vague promises.
Europe has the Italian Referendum (on reform of the electoral system) in December. A rejection is now more likely, just out of the wish to poke the establishment rather than thorough analysis. France has elections next Spring: does this fuel the protest parties or ram some sense into the established politicians? We assume the latter.
The German and Dutch elections next year also raise the same questions.
Markets and economies hate uncertainty, and we now have more of that. Can Trump really reflate* the US economy? What with? Hot air?
‘When the facts change, I change my mind!’ It seems prudent to take a more conservative stance for the time being and have some more cash in the portfolio. There will also be some stock specific issues to address.
This has not prompted wholesale changes to the portfolio, if anything it reinforces our preference for quality stocks yet further. We are reducing our weighting in banks, as the probability of a December interest rate hike in the US is understandably reduced.
Longer term, we need to consider whether a set of reflationary measures by governments (whether in the US or Europe) changes the inflation outlook. That in turn has a further knock on impact on the valuation of ‘growth’ versus ‘value**’, and therefore whether we should be adding more economically sensitive stocks or names that are a beneficiary of any attempts at reflation.
*Policies intended to help an economy recover and promote inflation.
**Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore their share price should increase in value. Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.