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Local Financial Institutions Profiting from the Trump Trade
Sunday 17, December 2017

Local Financial Institutions Profiting from the Trump Trade

YaniqueF_1

The “Trump trade” is commonly used to refer to investing with the optimistic expectation that the financial markets will boom under the stewardship of Donald Trump as President.  Trump’s campaign was built on pro-growth policies such as tax cuts, infrastructure spending and reduced regulation of the financial sector. It was also expected that with a Republican Government, new policies could be implemented more quickly.  Stock and bond prices increased in anticipation of Trump’s business friendly policies. The S&P 500 returned 21.26% over the one year period after the election, and the Bloomberg USD Investment Grade Corporate Bond Index increased by 3.98% over the same period. Asset prices were also pushed higher by improvements in the global economy, accommodative central bank policies and high levels of liquidity.  

Following the Trump win, some emerging market securities fell in value. Mexico was particularly negatively impacted by Trump’s nationalist policy pronouncements. For example, the peso fell by 11.3% two days after the election.    Eugene Stanley, VP of Fixed Income & Foreign Exchange at Sterling Asset Management, explained that “Immediately after the election, concerns over NAFTA and the border wall drove the prices of Mexican corporates down. Over time, these concerns have waned as NAFTA has not yet been renegotiated and the border wall funding has not been secured. Coupled with the improvements in the Mexican economy, Mexican equities and corporate bond prices rose during 2017”. He added that “Pemex was one of our best trades this year with an annualized return of 19%.  Our selection of Mexican Banks and non-bank financial institutions have also performed well for us.

Many local institutions have benefitted from the global rally in financial asset prices. For example, Government of Jamaica international bonds have increased and the GOJ 2028 bond went from a low of 106.538 three weeks after the election to 116.170 (an increase of 9.04%) post-election (or over the past 12 months). Banks, insurance companies and unit trusts with sizable exposure to GOJ debt have observed large increases in their comprehensive income.  This effect has partly contributed to the successful results posted by local financial institutions during the last 12 months.  According to NCB’s most recent results “Gains on foreign currency and investment activities improved by $3.0 billion or 63%, driven by gains from the sale of debt securities. This was due in part to stronger demand for Government of Jamaica (GOJ) securities in the context of high levels of market liquidity..."

However, local companies with exposure to the US, Europe and emerging markets have come out on top.  On the local stock exchange, investment vehicles such as Sterling Investments Limited (SIL) have tripled their trading gains over the last year, thanks to its European exposure and a rally in some of the emerging market issuers which initially suffered after the Trump election. According to Stanley, the European rally has been most rewarding given the size of the gains relative to the amount of risk. According to the company, “The recovery in the European economy and the strengthening of the banks has driven outsized gains in European Bank bonds. These represent some of the most profitable trades for SIL. Deutsche Bank was one of the most outstanding performers in the European bond category with an annualized return of 29%.

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

 

 

 

 

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