Mr. President

Donald J. Trump – the rank outsider – is going to be the next President of the United States of America

To the surprise of pollsters, political prognosticators, financial forecasters and to the average punter, Donald J. Trump – the rank outsider – was elected President of the United States. A cacophony has ensued. Opinions abound. Watching the news at the moment is to subject oneself to multiple screaming heads. All these voices create noise. Noise, often, demands a call to action: a primal instinct to protect; to act; to react; to do something, anything.

We will do no such thing. Through the last weeks of oscillating poll results and shifting probabilities, our Investment Policy Committee (IPC) has remained cautiously optimistic, retaining significant exposure to risk-assets such as equities. As we noted in the run-up to the US Presidential election – and myriad other geopolitical risk events – our investment process seeks to evaluate the long term fundamentals rather than focus on short term movements. It is deliberately long-term. It aims to eschew the “noise” which inevitably surrounds such events, and looks at what we consider indelible, longstanding drivers of asset returns: valuation, momentum and sentiment. To the degree that geopolitical events impact the fundamentals, we pay attention. To the degree they do not, we remain positioned to take advantage of any excessively bearish sentiment by taking contrarian positions.

In the immediate aftermath of any event, as markets digest and process new information, there may be elevated levels of noise for some time. Markets may move up or down sharply. They may settle, only to begin moving again. These events, in isolation, are not of concern to long-term investors such as ourselves.

It is prudent to remember that markets are replete with bouts of volatility – it is normal, indeed, expected. This year began amidst concerns of a Chinese "hard landing" and a collapsing commodity complex; the FTSE 100 and the S&P 500 were both in double-digit negative territory for the year in February. Once again, markets were sharply lower following the EU referendum, as Europe entered a "new paradigm". Similar events can be listed going back over the last seven years, be it the "Taper Tantrum", "Grexit" or the “Fiscal Cliff", to name but a few. In hindsight, each of those periods resulted in deeply oversold sentiment. Prudent investors eschewed the noise, remained focused on the fundamentals of valuation and momentum, and harvested the subsequent returns.

We are nothing if not prudent; and our consistent, long-term view has been rewarded. Equities, where the bulk of our assets are concentrated, have been well-supported through the last seven years – despite the noise – because they have been attractively valued. They remain fairly valued, if not outright attractive. Bonds were expensive prior to the volatility generated by the US Presidential election. Nonetheless, we hold them as a counter-weight to our other positions, albeit with shorter-than-benchmark duration (i.e. less sensitivity to interest rate changes). Here again, with yields having risen, somewhat counter-intuitively following the vote, we remain comfortable with our stance.

We have generally been reducing risk in portfolios over a number of years, largely in response to less compelling risk premia on offer, not due to noise. Part of this risk reduction has resulted in an increased allocation to cash. It keeps our “powder dry” for attractive investment opportunities, and reduces portfolio volatility from potential risks of all kinds, including the geopolitical. We continue to hold the bulk of our cash position in Sterling, and are sanguine on the currency given its steep post-Brexit correction.

If you have any questions, or would like further reassurance, please do not hesitate to speak to your private banker who will be happy to answer any questions you may have.


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