Globalisation and Post Trump Investment Ideas

What followed this year’s major historical events will indirectly shape our lives for the foreseeable future. I am obviously referring to the BREXIT vote in the UK and the presidential election in the US, as what followed has surprised may investors.

The carnage in financial markets that followed the BREXIT vote lasted only a few days, and was in fact soon reversed. The US election surprisingly pushed equity markets to new highs and started a commodity price recovery and changed the long-term yield outlook.

In this scenario, I find the marked increase in uncertainty inconsistent with the increase in risk taking. BREXIT and Trump have reversed the trend towards trade standardisation, what many call Globalisation.

Modern Globalization accelerated after World War II as major governments laid down the framework for international monetary policy, commerce and finance. The idea was to facilitate economic growth by lowering trade barriers.

Globalization accelerated as aviation became affordable in the 1970’s and peaked as technology made communication, information and competition simple. The globalized world brought people, cultures, markets, religions and politics closer together, often with mixed results.

While Globalization shifted out the global production possibility frontier, leading to a period of above average aggregate prosperity, it also increased the gap between the haves and the have nots. The owners of capital and the owners of information could possibly become billionaires, while for the untrained, moving up in society became much more difficult.

A move towards less globalisation will probably appease many that have been left behind. However, we will have to get used to lower standards of living, less freedom and higher prices. Eventually there will be protests for more freedom and free trade. The cycle will go on.

I will not debate the merits of either position at this point, my specialized job makes bias obvious, I will however, present a series of scenarios which I believe may present investors with opportunities or risks in this first stage of the post globalisation world.

Russia

The US will attempt to normalize the relationship with Russia. The main loser will be Ukraine. Europe will follow the US lead. Towards the outside world, Europe will portray a measure of disgust, but in reality most governments will sense relief.

This scenario creates a buying opportunity in Russia Equities. Try to time a good entry point now, wait for a meeting between Trump and Putin, which will surely happen, and sell on the eve of the meeting. This strategy obviously carries a high risk.

Bonds

Bond markets have been rallying for over thirty years. Expected interest rate increases in the US and the possibility of tapering in the EU risk revering this trend. If you subscribe to these two scenarios, then long term bonds are not your cup of tea. Reduce drastically long term bond holdings.

Banks

Banks have been under fire since the financial crisis. Tightening interest rates, but mostly an establishment that sought comfort from an increase in regulations has forced financial institutions to the ropes.

If there is any positive to Trump’s election, maybe it is his commitment to reduce financial regulation. While regulation was supposed to make banks safer, it has also sniffed out their sources of income. Without income no bank is safe. Another formula has to be found.

In the meantime, any deregulation coupled with an increase in interest rate will jump start bank returns. Get into bank shares now and enjoy some dividends along the way.

Emerging markets

As the USD strengthens emerging markets, especially commodity based economies, will suffer. Avoid in the short-term.

I will continue this article next week were I will forecast the future of the EU, the price of oil for the next ten years and other opportunities in equity markets.