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Monday, November 07, 2016

Expressing a view on a Trump win

by Parikshit Kabra.

A spectre is haunting global capitalism - the spectre of Donald Trump. A big question looming over the global financial system today is: Will Donald Trump make it? Each of us have views about whether he will. What will the short term impacts upon financial markets be, if Trump wins? What position should one adopt, if one believed that Trump would win?

Decision markets


The simplest answer is: One should trade on a decision market to express the `Long Trump' view. This is hard to do for people constrained by capital controls. And, for most people, the problem is not so much about expressing a Long Trump view as the problem of understanding the vulnerabilities in their portfolios.

Impact on the USD


The USD has risen by 2 to 12% in the year following all US presidential elections from 1980 onwards. A Trump win could boost the USD due a 'safe haven' effect. With fears about the world economy, many investors could withdraw their investments in Emerging Markets.

If Trump loses, there could be two effects working in opposite directions. Reduction about fundamental risk in the US would be good for the dollar, but this would not be augmented by a safe haven effect.

Gold


A Trump win will likely lead to a rise in Gold prices, as buyers of gold are passing a vote of no-confidence in civilisation. When George W. Bush won the 2nd time, there was a sharp surge in the price of gold and it rose to an all-time high.

Conversely, if Trump loses, gold prices may go down somewhat as that fear subsides.

Nifty


If Trump wins, there will be greater uncertainty for the world economy, VIX will go up, flows into EMs will go down, and that's bad for Nifty. Conversely, if Trump loses, there would be a small positive impact upon Nifty.

The Indian IT industry


The Indian IT industry is vulnerable to changes in immigration laws in the US. With Trump threatening to make immigration more difficult, make visa applications harder and also possibly introducing an outsourcing tax, a Trump victory should imply a fall in the IT stocks across the board.

The adverse impact of Trump would be greater for low value firms that do more body shopping. One way to setup a trade would be to sort the IT companies into top and bottom quartile by revenues per employee. The trade to employ would be to be long the high revenue-per-employee firms and short the low revenue-per-employee firms. This would yield a hedged portfolio where all other macroeconomic and industry news cancels out, and does well if Trump wins.

Pharmaceutical companies


While many American analysts believe that a Clinton presidency will mean a drop in pharma stock prices due the price pressure she might bring, the case might be the opposite in India. Some traders believe that the Indian pharma companies, which provide generic drugs for the US market, are gaining from the introduction of Obamacare (which has been pushing for greater use of the cheaper, generic drugs). Trump, who has promised to repeal this Act, may reduce the pressure to use generics and thus hurt Indian pharma companies.



Parikshit Kabra is curious about financial markets at Bain Consulting.

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