Nov 2, 2016

An Extremely Quiet October. All Eyes on the US Presidential Elections

The month of October has been uncharacteristically quiet as the whole world turn their attention to the increasingly bitter US presidential election. The outbreak of a series of scandals related to how Donald Trump treat women has put the Republican nominee on an unfavorable front. However, team Clinton was again plagued by a resurfacing of the private email scandal initiated by the FBI when Hilary Clinton thought that she has put the matter to rest. The lead which Team Clinton built up over the past few weeks evaporated with new polls putting Team Clinton at a slight advantage. Investors, still stinging from the unexpected Brexit vote results, decided to hedge their bets in the case of a possible Trump presidency.

Investors love stability and a Clinton presidency will indicate that a status quo will be maintained and no drastic measures or policies should take place if Team Clinton wins. However, a Trump presidency will lead to a Kindle Egg experience... You will never know what you will get.

However, should the Trump presidency carry out the rhetoric which he spelt out during his presidency election campaign, the immediate concern will be the possible replacement of the dovish Janet Yellen with a more hawkish US Federal Reserve chairperson.

"We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that's doing political things," Trump said, adding, "the Fed is not doing their job. The Fed is being more political than Secretary Clinton."

As stated in my previous analysis, the current bull market is based on a foundation of a prolonged low interest rate environment with the stock market averaging at 3.5% while the GDP of US has been averaging at 0.9%. Global markets reacts to any potential change in the interest rate environment greater than in any time in the past century. A new US Federal Reserve chair person who is hawkish will immediately unleash chaos in the stock market.

Other points to note is that a Trump presidency may engage in protective policies against emerging markets to protect US companies. Combined with a weak Chinese economy, rising US interest rates and a possibility of increased trade barriers against emerging markets, the biggest damage done perhaps will be to the emerging market equities, which has been performing relatively well as compared to the US and European equities.

With the possibility of a series of black swan events which may happen, on the backdrop of a stretched global stock market valuation, the probability of a market correction seems higher than that of a strong rally. Meanwhile, on the resource front, oil has been retreating below the $50 mark ever since the failed OPEC meeting in October. In terms of valuation, resources are currently the most attractive and I am looking to move a portion of the portfolio into that. Meanwhile, we will hold with abated breathe and observe the results of one of the most bitter and entertaining US Presidential elections.
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