MARKETS

Politics and portfolio positioning

Ursula Marchioni |25-Nov-2016

2016 looks likely to be remembered as a year in which political risk gained greater prominence in portfolio positioning. Flows into Exchange-Traded Products (ETPs) during October and in the first few days after Trump’s victory show the extent to which investors were making investment decisions around the US election.

Political rally?

Despite anti-trade sentiment featuring prominently in the US election campaign, the pace of global inflows into emerging market (EM) equities ETPs picked up in October – $3.6 billion versus the $2.7 billion recorded in September.

Flows into EM debt (EMD) ETPs cooled slightly, however, as investors appeared to factor in political risk for the asset class. $600 million flowed into EMD ETPs globally in October – less than half the inflow into the same exposures the previous month.

 

Investing for inflation

Sentiment was not all risk on, however, as investors seemed to seek protection against the possibility of rising inflation.

By the end of October, $108.8 billion had flowed into fixed income ETPs globally in 2016 – well-above last year’s full-year flow record. Of the $4.1 billion that flowed into fixed income ETPs in October alone, $1.2 billion went in to US Treasury Inflation-Protected Securities (TIPS) ETPs. $500 million flowed out of conventional US Treasuries ETPs over the same period.

Gold ETPs attracted $1 billion of inflows globally in October – an increase on the $800 million of flows into such exposures in September – as some investors appeared to view gold as a potential hedge against inflation and a safe haven ahead of the US election.

By the end of October, $108.8 billion had flowed into fixed income ETPs globally in 2016 – well-above last year’s full-year flow record

Early post-election indicators

At the time of writing, 10 days have passed since Donald Trump’s surprise election victory – too early to draw any firm conclusions about long-term investor sentiment in relation to the result from fund flows, in our view.

Analysis of ETP flows from 9 November to 16 November, however, does provide some early insight into investors’ immediate reaction to the news. Globally, $30 billion went into US equity ETPs, with $5 billion of that flow into US financials ETPs and $3 billion into US healthcare ETPs – two sectors that were in firm focus throughout the election campaign. US small cap ETFs attracted $6 billion, as some investors appeared to believe that Trump’s domestic focus could benefit smaller US companies.

EM equity and fixed income ETPs lost $2.5 billion and $3.3 billion respectively in the four trading days following the election result. It is not clear at this stage whether these trends will persist through to the end of the month and beyond. Despite the flows we have observed coming out of EM ETPs, we still find reasons to believe that EM could perform well over the longer-term, for example, particularly if Trump steps away from anti-trade comments he made during the election campaign – many EM countries are in a significantly stronger fundamental position than they were during the 2013 ‘taper tantrum’.

Ursula Marchioni
Chief Strategist EMEA, iShares
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Pre-election flow data sourced from the October 2016 BlackRock Global ETP Landscape report. All other data sourced from Bloomberg unless otherwise stated.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 21/11/2016 and may change as subsequent conditions vary.

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