Neil Woodford, the high-profile fund manager, has predicted the emerging market regions could end up being among the biggest equity market losers, following Donald Trump’s US presidential election.
Woodford, who manages the CF Woodford Equity Income fund, said he expects globalisation to come under the spotlight under a Trump administration, and as a result investors should ‘expect a greater focus on domestic political priorities at the expense of free trade and globalisation’.
As a result, he adds, the fine performance the emerging market regions have enjoyed in 2016, particularly over the past six months, could grind to an abrupt halt. The average fund in the Investment Association’s emerging market sector has enjoyed gains of 31 per cent since the start of May.
He described today’s market reaction as ‘muted’, adding that investors have perhaps learnt their lessons from how markets fared following June’s Brexit vote.
‘It was wrong to overreact to the Brexit vote, and in my opinion it would be wrong to overreact today,’ says Woodford. ‘The election result could, however, puncture the love affair that the market has had this year with emerging market equities and debt.’
As a counter argument, Woodford acknowledges that due to constraints of office some of Trump plans and pledges may never see the light of day.
‘Lots of things that are said on the campaign trail cannot be delivered. The direction of travel on globalisation and trade does appear to have changed, but there will be checks and balances on the speed and extent of the more protectionist agenda that may emerge.’
Turning his attention to US interest rates and the economy, Woodford says a December interest rate rise now looks off cards, while a recession is unlikely to materialise.
He adds: ‘The Fed is likely to have more than half an eye on its role as global financial market policeman, and the uncertainty that this election result creates for the global economy, and in particular for emerging markets, could weigh on its policy decision in December.’
‘Overall, I expect the momentum in the US economy to continue. I expect modest growth in 2017, relatively muted inflation and, with the prospect of a slightly more simulative fiscal policy and the absence of rate hikes, I don’t think a Trump presidency foreshadows a US recession.’
Woodford stressed his initial judgement is that Trump’s victory doesn’t change the fundamental assumptions he has incorporated into his investment strategy.
‘I remain confident in the positioning of the portfolios and their ability to deliver attractive returns over the long term. Clearly, our significant weighting towards the healthcare industry has weighed on performance for much of the year, as the market has fretted about the prospect of a Clinton presidency and what that may mean for drug pricing,’ says Woodford.
‘Now the outcome is known, the prospect of drug pricing legislation is off the agenda. Meanwhile in California, proposition 61, which would have limited the price of prescription drugs in the state, has been voted down. From a sentiment perspective at least, the news should be positive for this important part of the portfolio.’