Eric Reguly
Donald Trump's prediction last week of a "Brexit times 10" electoral upset in Tuesday's U.S. election rattled investors. The polls were already tightening, suggesting that the impossible – a Trump victory over Democratic rival Hillary Clinton – was not so impossible after all. Investors took risk off the table, delivering a nine-day losing streak to the S&P 500, its longest in more than three decades.
While a Clinton victory – she is still ahead in most polls – might deliver a strong relief rally, the Brexit experience suggests a Trump victory may not send investment portfolios to the knackers' yard. To be sure, the dollar and American equities could get hit with a big, day-after sell-off. But equities could recover fairly quickly, as they did in Britain shortly after the June 23 referendum on European Union membership.
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Still, some economists and think tanks expect a brutal sell-off if Trump wins. Barclays said his victory could trigger an S&P fall of 11-13 per cent. The Brookings Institution said the fall could be 10-15 per cent. Both of these scenarios seem exaggerated, especially since investors have already started to discount a Trump victory. They seem more prepared for Trump's possible arrival in the White House than investors in Britain were for Brexit.
According to the polls, Britain's exit from the EU – Brexit – was not supposed to happen. It did, by a narrow voting margin, triggering a sharp plunge in British stocks and predictions of economic collapse from the pro-EU "Project Fear" mob.
In the two trading days after the June 23 Brexit vote, the benchmark FTSE-100 index declined almost 6 per cent, then reversed course. It has been uphill ever since. In spite of Brexit's uncertainties, the FTSE is 13 per cent above its post-Brexit low and 6.75 per cent up over a year. And the British economy? It expanded by 0.5 per cent in the third quarter. So much for the doomsday scenarios.
The British markets did not crumble in good part because sterling plunged after the referendum – it's now down about 15 per cent – providing a handy cushion for investors, as did the Bank of England's new economic stimulus package, announced in August. Big British companies – those with substantial overseas sales, such as the commodities giant Glencore and fashion house Burberry – did especially well. Glencore is up about 80 per cent since its post-Brexit low (the commodities revival, of course, helped). Burberry is up by more than a third.
A few savvy hedge funds made a killing on Brexit. One fund that did well was Livermore Partners of Northbrook, Ill., which piled into FTSE names. "With the cheap pound, we could buy more for less," says David Neuhauser, Livermore's managing director. "The sterling discount of 15 per cent to 20 per cent meant that good companies that were trading at a 9 [price to earnings] multiple became companies with a 6 to 7 multiple."
Of course, Brexit and a Trump victory would not be equal geo-economic events. The British economy is tiny compared to the United States and any sustained fear in the American markets would have worldwide implications. Still, there would be some similarities. The dollar would almost certainly fall, making U.S. equities more attractive to foreign investors. The shares of American companies with big international presences would have an advantage, as the big FTSE companies did.
The U.S. Federal Reserve, which recently signalled it might raise short-term interest rates as early as December, might stay on hold, putting some downward pressure on the dollar. On Sunday, economists at the French bank Société Générale said the European Central Bank, under a Trump victory, probably would delay the wind-down of its massive quantitative easing program.
Oil prices and oil shares might benefit under this scenario. Oil is priced in dollars; typically, oil rises when the dollar falls. A Trump victory could boost oil shares, all the more so because he is a bigger advocate of drilling and pipelines than Clinton is.
The longer term implications for the markets of a Trump victory are much harder to ascertain. They depend on a wild array of factors, ranging from whether the Republicans can retain control of both the House of Representatives and the Senate to the outcome of Trump's pledge to unleash a new round of fiscal stimulus that would lift growth, even if it meant running fatter budget deficits.
After that, investors would want to see whether Trump would really erect a wall along the Mexican border (note the recent volatility in the Mexican peso) and reverse globalization by stalling new trade deals or reversing old ones. To be sure, Brexit is also a long-term risk too. Britain will not even leave the EU until 2019 and its terms of disengagement and possible re-engagement with a fresh trade deal are entirely unknown at this stage.
Greed and fear drive investor strategies in the short term as well as the long term. Investors in Britain who panicked the day after the Brexit vote left a lot of profit on the table. A Trump victory could deliver the same day-after shock but also hand brave investors a delicious buying opportunity.
Eric Reguly