Despite analysts predicting a massive flight from risky assets in the event of Donald Trump winning the US Presidency, it appears the opposite has happened.
Ursula Marchioni, Chief Strategist, iShares EMEA at BlackRock.
Since election day, capital markets have experienced significantly higher trading volumes, in stocks, bonds and exchange-traded funds; however, US stocks have rallied to record highs with investors positioning themselves for a risk-on environment, while traditional safe haven assets such as US Treasuries and gold experienced large outflows.
The Financial Industry Regulatory Authority found that at least $20bn of investment grade debt has been bought and sold on seven separate days since 8 November, which has only happened 18 times since records began in 2005, as reported by the Financial Times. On the New York Stock Exchange, the Nasdaq and NYSE, trading has averaged 7.9bn US shares per day since the election, which is 20% higher than the typical day since 2011.
In the world of ETFs, $56bn of net inflows was gathered globally in November, the best month since December 2014. Trends reflected how ETF investors were positioning their portfolios for a risk-on environment ahead of Trump’s presidency, said Ursula Marchioni, Chief Strategist for iShares EMEA.
“The results triggered inflows into US equity ETFs on expectations of President-elect Trump’s pro-growth policies,” she said in a statement.
Ian Lyngen, a rates strategist with BMO Capital Markets, told the Financial Times: “We saw a significant paradigm shift in expectations in the wake of the Trump victory. We’ve gone from expectations of more of the same with Clinton to an unknown world in terms of fiscal stimulus and what it means for the economy. People have subsequently started repositioning their investments.”
US financials, industrials and health care ETFs all benefited in November, gaining $8.2bn, $3.5bn and $2.0bn respectively. On the other hand, investors dumped defensive sectors like utilities last month.
“The inflows largely went into broad large cap exposures, as well as financials which benefited from yield curve steepening and expectations of lower regulation under Trump’s administration,” Marchioni added.
US financial sector ETFs continue to rally one month after the election. The $548m iShares S&P 500 Financials Sector UCITS ETF (LON: IUFS) is up more than 17% since 8 November in USD terms. The ETF is offered with a total expense ratio of 0.15%.
The sector may still have room to grow as developments show the extent to which Trump is willing to work with banks in boosting business – last week Goldman Sachs president and COO Gary Cohn was appointed as Trump’s national economic council director.
Although Goldman Sachs lost more than $5bn during the last credit crisis, Cohn believes that hampering banks via regulations harms the end consumer. The Dodd Frank Act, introduced to safeguard banks post-2008, will most likely be repealed, ring fencing taken down and capital buffer requirements reduced.
Executives at Citigroup, Bank of America, and JP Morgan have all projected positive fourth quarter revenue growth from their trading arms – a jump of as much as 15% from the previous year at the latter two banks.
Broadly speaking, the appetite for risky assets was also boosted by Trump’s promise to lower taxes, reduce regulation and lift restrictions from the energy industry.
Investors withdrew $2bn out of US government bond ETFs causing prices to fall and yields to rise. The 10-year US Treasury yield has risen from 1.85% on election day to 2.4% as of 10 December.
Gold ETFs, also seen as a safe haven investment, lost $4.5bn.
Emerging markets saw large outflows as investors raced to protect their portfolios from higher yields in the US. Broad EM equity ETFs saw outflows of $3.2bn last month, while EM debt ETFs lost a further $3.3bn, BlackRock found.