Sharp rise in rates, bond market crash, soaring dollar … There is no shortage of worries for investors with the election of the economic UFO Trump. How to react ? Where to place your money? My advice to see more clearly in this hectic context.
After his inauguration as the 45th President of the United States on January 20, Donald Trump will be in charge of the world’s first economy. How will the real estate tycoon behave once he’s settled in the White House? Between building a wall between the United States and Mexico, destroying the Islamic state and repatriating jobs relocated to China, what exactly will be its policy? Will he demonstrate pragmatism and diplomacy? Will it be a “new Reagan” or not? If it is difficult to answer these questions at the moment, it is clear that since the billionaire’s victory on November 8th, the situation has changed for Internet giants who represent, according to Trump, the harms of globalization. Since 9 November, the Gafa have seen their capitalization on the stock market melt. Beginning with Amazon, whose title dropped by nearly 10% (about $ 30 billion) in the days after the US election, before returning to a few colors. As a result, the group founded by Jeff Bezos has fallen back into the ranking of the biggest US companies at levels occupied by Berkshire Hathaway, the holding company of Warren Buffett, or the oil giant Exxon. In short, savers and investors will face a period of uncertainty and high volatility in the markets for several months.
1. Hello the “Trumpflation”
“Trumpflation”. This is the new buzzword. The awakening of inflation by Donald Trump has become the scarecrow of bond markets. Since the election, the long-term rates dictated by the government bond markets have risen dramatically: at the time of writing, the 10-year US rate is at around 2.20% (Compared to 1.8% on 6 November). Some like the chief strategist of the bank Puilaetco Dewaay Frank Vranken even see the US Treasury bond (at 10 years) settle around the 2.50% in the coming months. And sympathy, European rates also climb: the rate of the Belgian bond at 10 years rose from 0.46% to 0.73%.
Of course, there are still many unknowns about what Donald Trump’s economic policy will be. “We are still waiting for the formation of the cabinet,” observes Jérôme Van der Bruggen, head of strategy at Degroof Petercam. Key figures of the Republican party should integrate it, but we do not have much view on the policy of the new president. ” One element seems certain at the end of the first statements of Donald Trump: the United States will embark on a vast program of public expenditure to modernize their infrastructure and lower the tax rates of individuals and companies. “Everyone thought that the United States would slowly arrive at the end of the cycle (of growth) towards 2017-2018, and therefore we should not expect a sharp rise in rates. Waiting for an extension of the cycle until 2018-2019, “observes Philippe Gijsels, head of strategy at BNP Paribas Fortis. He adds that if the opening of borders boosts world trade and lowers prices, the introduction of protectionist measures has the opposite effect and reinforces inflationary trends. In short, “Trump’s victory has largely changed our predictions for interest rates,” said Geert Gielens, chief economist at Belfius. “His economic program is vague and light not allowing us to get a clear idea. Measures adopted, their calibration and what the Fed will decide at its next meeting in mid-December, but a rise in US interest rates is now more and more likely. Some measures have to support the economic growth (Taxation for companies, infrastructure spending). The non-signature of the TTIP will not have a huge impact, it will be a shortfall but not a loss.The Trumponomics are fundamentally inflationary and therefore the rates will go up again, Especially long-term ones, which are currently too low. ”
Indeed, the rise in interest rates should be further encouraged if, in order to finance these tax cuts and major works, US debt goes up. We are talking about an increase of 3.5% per year. “There is a logic for a rise in rates,” says Philippe Gijsels. The rise in rates did not begin with the election of Donald Trump. “It started on July 8,” notes Jérôme Van der Bruggen, “and is based on several factors: an improvement in the world economy, a change in the strategies of the central banks (who realize the negative effects of their politics of negative rates) and the prospect of fiscal relaxation to support the business, a prospect that naturally grew stronger with the election of Donald Trump.
To sum up my advice for you is: because of the risk of rising rates, if you negotiate a credit, hurry to conclude!
2. Obligations: some resist
The question is therefore whether this rise in rates will be brutal (and in this case a bond crash would have very significant consequences) or moderate. “Risk of runaway is not ruled out, but central banks are driving a policy that should curb too sharp movements,” says Bernard Keppenne, chief economist of CBC. “The ECB, the bank of Japan and even the Fed Continue to buy back bonds on the market. ” Bernard Keppenne therefore expects a mild normalization, with US key interest rates expected to rise by 0.5% (from 0.75 to 1.25%) at the end of next year and by 10 years close to 1% compared with 0.7% today.
If, therefore, the context is not good for bonds, this does not mean that they should be excluded from a portfolio, which must always be diversified. But choices must be made. In this way, Jérôme Van der Bruggen has its preferences on government bonds with relatively short maturities and on corporate bonds of good quality. And then, also, on inflation-linked bonds. These are government bonds whose coupon increases in line with rising prices. Because much of the rate hike, as we have seen, is based on inflation expectations, these bonds have outperformed much better than the others. “A week after the election, US government bonds had lost 4.3%, European bonds 3.5%, but inflation-linked bonds had fallen by only 1%,” said Jérôme Van der Bruggen.
To sum up my advice for you is to focus on short-term and inflation-linked bonds.
3. Cash remains king
Due to the increased uncertainty, most experts recommend that liquid and risk-free positions be preferred. As Frank Vranken, chief strategist at Puilaetco Dewaay advises, “we need for the next three months to remain prudent with enough cash”, that is to say essentially savings deposits. In addition to being available at any time, money deposited in a savings account benefits, let us recall, the guarantee of 100,000 euros (per person and per bank). This security unfortunately has a price. As is well known, many booklets offer only the legal minimum of 0.11% (basic rate of 0.01% + fidelity premium 0.10%). A few days ago, BNP Paribas Fortis and its subsidiary Fintro even lowered the rates of their unregulated savings accounts to their private customers (the Growth Deposit Account for BNPPF and the Blue Plus Account for Fintro) at 0%. A first in the history of unregulated deposit books. In short, the savings account no longer yields anything. And as Belfius chief economist Geert Gielens explains, things are not about to change. “I do not expect rates to rise in the savings account very quickly, but short-term rates will remain negative for quite some time, perhaps even for a few more years. Remain very weak, “says Geert Gielens. However, rates on housing loans have already started to rise with several major banks (KBC, ING and Belfius). History to strengthen the margins, recently undermined by the aggressive monetary policy of the ECB and its president Mario Draghi.
To sup up my advice for you is to keep cash in your safe lock and buy some gold.
4. A strong dollar … but not too much
In this context of rising US key interest rates faster than expected, and rising bond rates, the dollar is expected to strengthen … And it has already done in large part because the Fed is expected to plot its key rates in December. The rise in the greenback is general: DXY, a popular barometer that measures the value of the dollar against a basket of other major world currencies has reached a level which is not touched for 13 years.
“In fact, since the election, the dollar has already made a big part of the way,” judge Bernard Keppenne. Before the election, it was indeed 1.13 dollars for one euro. The price dropped to 1.07. The CBC economist sees it stabilizing in the coming months at around 1.05. A forecast shared by Geert Gielens for whom “the dollar could appreciate even a little, but for now not be able to achieve parity with the euro.” The same is true on the part of ING where it is estimated that the additional reinforcement of the greenback should remain limited in the short term. “In other words, parity does not seem possible at the moment and the euro should continue to approach its levels of a year ago in the coming weeks,” said chief investment officer Thierry Masset. Confirmation also from Jerome Van der Bruggen: “The Trump effect can now play both ways. The dollar could be further strengthened, driven by the widening gap between US and European key rates and the strongest growth in the US But other elements can play in the opposite direction: in terms of purchasing power parity, the dollar is already very expensive. ” Still, for a Belgian saver, the dollar retains its characteristic of safe haven, adds Degroof Petercam’s strategist: “We always have dollar in our portfolios because we must consider all the scenarios.”
To sum up my advice for you is to put a little cash $ in your portfolio, to benefit from a rise in rates.
5. Shares: Winning Europe?
In this context, which is globally unfavorable to bonds, is good for equities, as Desir Godfroid, CEO of Patrimonia, explains: “The rise in US interest rates will affect rates in Europe, which means that the debt will cost more. Not only will it lead to a return of flame on the bond market, but it will also increase the deficits of European countries, already heavily indebted, and the risk of default will increase in this context and given the current housing bubble, there are not many other choices than stocks. ”
In this respect, we have also seen the world stock exchanges react in two stages: falling under the shock of surprise and then rising on the basis of a “republican” policy globally favorable to companies, with a recovery in investment and accommodate taxation. The stock markets of the developed countries thus globally hailed the victory of Donald Trump. On the other hand, emerging market places have generally suffered, anticipating more protectionist barriers and a more complicated financial situation for dollar-denominated firms. “The biggest problem,” says Philippe Gijsels, “is whether the current trend is a real trend or a simple temporary reaction.” When analyzing market reactions after previous elections, there is a minimal impact each time, but this time for each sector, the designation of Donald Trump has consequences: negative for companies in Silicon Valley, but positive for automakers, banks, raw materials producers, companies active in the defense and construction. ”
Philippe Gijsels is not the only one to question the duration of the stock market upturn. “The first measures announced by Trump are globally favorable for US companies, but we lack visibility on the follow-up,” said Bernard Keppenne. “Will customs tariffs be raised, and with what impact on trade and global growth?”
“Yes to shares, especially the European ones,” explains Jérôme Van der Bruggen, “because they are cheaper (they have the highest risk premium) and because the margins of European companies do not still recovered their pre-crisis level, so they can go up again. ” Conversely, US companies seem to have already made their catch-up. So Geert Gielens sees a slight increase of plus or minus 5% for the European stock markets in 2017. But not much more. “Growth remains too soft (1.5% in 2017) and high unemployment (8% in Belgium, 19% in Spain, etc.),” he said. On the ING side, it is estimated that the Eurostoxx 50 is already benefiting for the moment from the growing interest for the banking and industrial sectors, well represented in the index. Frank Vranken believes however “it is useless to run for the moment behind the current price increase”. According to him, there should be better times in 2017 to do good business on the stock market.
To sup up my advice for you is to favor the European stock exchanges and the sectors which should benefit from the policy of revival American (construction, raw material, defense).
6. The Gold Report
In times of uncertainty, there are always some who advise investing in gold. Certainly, the ounce of fine metal remains on a 15% gain since 1 January, even after losing 4% since the US election. But the context is no longer bearer: “I do not see gold moving much in the next three months,” said Frank Vranken, seeing the ounce stabilize around $ 1,350 in the short term. “Gold is above all a refuge against deflation,” recalls Bernard Keppenne. Today, we are talking about a recovery from inflation. Most of our interlocutors nevertheless advise to hold a little gold. “It’s never bad in the portfolios,” say Philippe Gijsels and Jérôme Van der Bruggen. But they do not expect an upcoming surge.
Especially since the latest monetary events in India – the demonetization of large denominations in order to fight black money – are not good news: many Indians used their black money to buy gold. As Geert Gielens summarizes: “Have gold in the portfolio, yes, buy it, why not”.
To sum up my advice: for you is buy some gold but not overweight the weight of the yellow metal in your wallet.
7. Oil: Between two fires
If there is a sensitive sector to the election of Donald Trump, it is that of fossil energy. The willingness of the new US president to break the agreement on climate and support coal, gas and oil could therefore rebuff the cards. Nevertheless, here too, two opposing forces should neutralize large movements on the barrel.
On the one hand, there is always an overproduction (2 million barrels per day, says Philippe Gijsels). “The latest OPEC agreements, on a freeze on production, do not seem to be respected to the letter,” added Bernard Keppenne. Libya, Iraq still show rising output. But on the other hand, it is known that many American producers of shale oil have an operating cost at around $ 45 a barrel and therefore can not go down long below. “Oil prices are now at levels that I expected at the beginning of the year, that is, between $ 40 and $ 50 a barrel.” Because US shale oil is expected to play a stabilizing role, its break-even point is within this range, with oil prices likely to range from $ 45 to $ 55 a barrel, , Summarizes Philippe Gijsels. Lower than that, a part of the US production would stop, so there would be less supply and prices would rise again. Higher that that, the general supply would increase again. All this due to political risk. “Trump is unpredictable” adds Geert Gielens. It can create unexpected geopolitical tensions. But I have a hard time seeing a $ 100 barrel again. It is the Americans who are now determining the price of oil instead of the Saudis. “Indeed, OPEC’s latest attempt to raise prices has not had any impact in the short term,” concludes Thierry Masset, Which is also priced at a barrel price around $ 50 until 2018.
To sum up my advice for you is to not bother to fill the tank preventively.
Well, after all we have to stay tuned to see what’s going to really happen in the world in this Donald Trump presidency. What do you think? Is Trump presidency will affect your finances?