Donald Trump's America suits Canadian portfolio manager Keith Dicker just fine.
"We've been starting to add U.S. equities over the last few weeks and we'll be adding a little bit more over the next week or so," the president and chief investment officer of Halifax-based IceCap Asset Management Ltd. said after the U.S. election this week. "Then, we'll assess."
Confronted with a victorious Mr. Trump, global stock market investors panicked at first and then recovered their equilibrium and sent stocks soaring. There's a sense of not knowing quite what to make of Mr. Trump. On one hand, he's against free trade and has talked about introducing tariffs on goods imported from China. On the other, he's business-friendly in that he's for a lighter regulatory burden on industries like finance and supports cuts in personal and corporate income taxes.
Mr. Dicker, who holds the Chartered Financial Analyst (CFA) designation, has managed money for a big Canadian bank and an offshore bank in Bermuda. His monthly global outlook is read by investors around the world. He thinks Mr. Trump's tax policy could be good for the U.S. economy in the near term, particularly if it allows U.S. multinational corporations to move billions in offshore earnings back to the United States with a minimal tax hit.
But that's not why his firm is buying U.S stocks and other investments denominated in U.S. dollars. The real reason is that he sees the United States as a haven from the economic upheaval that Europe will unleash on the world over the coming six to 36 months.
Europe's problems have been in and out of the news for years. Slow growth, troubled banks, mounting debt levels and rising taxes have created a level of anger similar to what drove Americans to vote for Mr. Trump, the outsider, instead of Hillary Clinton, the established politician. This is the same anger that led to the Brexit vote in Britain this summer. "General economic conditions are not improving for the average person," Mr. Dicker said. "The political establishment is getting booted out all around the world."
He sees abrupt political change coming in Europe, where the likes of Mr. Trump gain power and shake the confidence of international investors who already have reason to be nervous about countries in the European Union. Italy, France and Germany are among the countries he sees as being at risk of having anti-establishment parties gain power. Austria can also be put in this group. There's an election there next month in which a candidate described in a recent Reuters report as an "an anti-immigrant EU critic" is running for president.
The highest-profile concern in the near term is Italy, which will hold a referendum Dec. 4 on political reforms that are seen as pro-business. A No vote would raise the risk of an election in which the anti-establishment party wins. The worry if this happens is that Italy pulls away from the EU, possibly by dumping the euro, and has to get by without EU assistance in areas like shoring up the country's weak banks.
Such a move might satisfy an urge to strike a blow against the EU, which has pressured Italy and other countries to put tighter controls on government spending. But there will be a price: Mr. Dicker believes that global investors will be less willing to own the bonds of countries rejecting the EU, and that this would cause big problems in the global bond market.
Central banks around the world have been holding interest rates at low levels, even below zero (what are called negative rates). But the rates administered by central banks are just for short-term lending. Longer-term rates are set in the bond market, where investors react to things like the strength of a country's economy and government finances. Several European countries don't score well by these measures, particularly if they pull away from the European Union and forgo the financial supports it offers.
What happens next in Mr. Dicker's narrative is that the price of long-term bonds falls hard and, in turn, yields rise (they move inversely).
So while central banks are keeping short-term rates low to support weak economies, the rates on longer-term government bonds would be rising. What follows are high borrowing costs for corporations and individuals and, in turn, recession.
The usual pattern in a recession is that interest rates fall, bonds do well and stocks tank. But Mr. Dicker says this time will be different – bonds will tank because of the Europe-driven sell-off and stocks will rise as an alternative. "People won't understand that," he said. "They've never seen it in their lifetimes."
The United States, president-elect Trump notwithstanding, would be the big beneficiary of this inversion of the usual behaviour of markets in times of recession. "No one should be afraid of the U.S. right now from an investment perspective," Mr. Dicker said. "We expect the U.S. dollar to soar, and the same with U.S. equities other than banks." U.S. banks are a concern because of their exposure to the government bonds that would be falling hard in value.
IceCap is looking at building an aggressive allocation to gold, but conditions to move ahead on that aren't yet right. For now, client portfolios have roughly 25 per cent of their holdings in short-term, high quality bonds. The firm steers clear of longer-term bonds, which offer both more yield and risk, as well as high yield and emerging market bonds. Mr. Dicker's plan is to expose clients more to U.S. Treasury bonds to take advantage of currency gains driven by a rising U.S. dollar.
Another 25 per cent of client portfolios is accounted for by what Mr. Dicker describes as a currency play. Basically, he's using a couple of U.S.-listed short-term bond exchange-traded funds as a way to benefit from a rising U.S. dollar.
The final 50 per cent is stocks, with the emphasis on the U.S. market. Recent global events have prompted Mr. Dicker and his firm to start a long-planned phase of aggressively adding to its U.S. positions. "We've been so patient, just waiting and waiting and waiting."