Craig Simpson sees the US election result as being broadly positive for more aggressive KiwiSaver investor balances

By Craig Simpson

One of the great unknowns of Donald Trump being the next POTUS (President of the United States) is what this mean for KiwiSaver balances. Rather than speculate right away, let's deal with what we do know so we can draw some rational conclusions.

Firstly, there are similarities with the US election outcome and Brexit as illustrated in this piece from Professor Aswath Damodaran of the Stern School of Business at NYU.

Markets were stunned with both outcomes and traders offloaded anything they could get their hands on. Fear of the unknown was front of mind and cash became king.

Just like with the Brexit vote, equity markets went into free-fall almost as if the world was approaching armageddon, only to rebound strongly and close higher within a few days.

Analysis by Vanguard, which offers funds that many KiwiSaver funds invest into, suggests that when there is a change of party in the presidency volatility in the market is between 30% and 40% higher than normal. Volatility is not one dimensional so this means the market is moving both up and down.

One example of the volatility in the market is represented by the S&P 500 Volatility Index which is also referred to as a 'fear index' (VIX).  The VIX spiked in the period leading into the election as seen in our chart here and then proceeded to unwind as markets "normalised". Between October 24 and November 4, the VIX was up 70%. There have been many blips up in the VIX over the past ten years, and each time there has been a reversion back towards the long run average.

Some of our observations are summarised below:

  • Returns from KiwiSaver funds for the three months ending October 31 are overwhelmingly negative. The markets had already been sold down ahead of the US election despite it looking odds on that Hillary Clinton would comfortably win so we are not surprised these have been crystallised into current returns.
  • NZ shares have been trending lower since early September but are still well ahead for the year. We are drawn to conclude there is an element of profit taking, possibly some de-risking through the reallocation of funds into larger and more liquid markets and investors are seeking stocks offering better value for money and growth opportunities.
  • US equity indices are pushing higher with fresh highs recorded for the DOW
  • Bond yields have spiked and this is a continuation of the pre-US election sell-off. Interest rate rises have been sharp and probably more severe than some may have expected. The NZ yield curve has steepened and reflects there is greater risk in some of the longer-dated maturities
  • The NZ dollar has fallen by approximately US3 cents post the election. Unhedged funds or assets will be receiving a pickup in returns but this is unwinding some of the losses incurred when the Kiwi was rising strongly.
  • Trump's policies seen as being positive for certain segments of the US economy - pharmaceuticals/healthcare, manufacturing, infrastructure, defence and security.
  • Trump's vision will mean greater government spending, larger fiscal deficits, higher inflation and rising interest rates. There are fears of trade wars and protectionism as a result of Trump's actions.
  • China, among others, will find they are hit with tariffs on goods exported to the US. A slow-down in the Chinese economy is likely to be bad news for other parts of Asia too.
  • Tech stocks are likely to be one of the losers under a Trump regime with the spotlight falling on trade and immigration policies - these will bite into profits of those companies that have components manufactured outside the US.
  • Commodity prices have risen post the US election
  • Markets have a way of adjusting to new environments quickly as we've seen following the Brexit vote.

What does this all mean for KiwiSaver investors?

Our expectation is we will see return contraction from KiwiSaver funds with large exposures to fixed income, property and other interest rate sensitive assets. Managers can mitigate some of the impacts of rising interest rates in a number of ways including shortening the maturity profile of their bonds, using derivatives to hedge or protect their positions and holding more cash.

We noted in our regular KiwiSaver reviews that some managers had already been proactively repositioning (derisking) their portfolios. Managers such as ANZ, Craigs Investment Partners (now Quay Street), Fisher Funds, Generate, Mercer, and Milford are examples of managers that had reasonably high cash positions inside either all or some of their portfolios.

Commentary surrounding the impact on equity markets is plentiful. Our view is, on balance, the current environment is likely to be choppy but trending more towards being equity market positive which is good news for those with higher equity holdings in their KiwiSaver accounts (Balanced, Growth and Aggressive categories). Our positive point of view does to some extent hinge on tax cuts and fiscal stimulus being positive for equity markets. The flipside is returns on equities could be tempered by fears around the burgeoning current account deficit in the US.

Many of the funds within KiwiSaver will be heavily exposed to the US economy and how these funds behave in the future will depend of what moves Trump makes and whether he actually follows through on his campaign promises.

The old passive versus active debate will raise its head too as KiwiSaver managers tout their respective positions. Remember it is time in the market and not timing the market that is important.

Don't be in a rush to switch your portfolios to more conservative or aggressive fund without seeking advice and carefully considering your long term goals and objectives.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

19 Comments

" Returns up to October were negative " this was way before the election which everyone assumed Trump did not stand a chance of winning .

I am suggesting that the investment / sharemarket is more concerned with fundamentals ( Low yields , high prices and high PE Ratios) rather than Trump .

I dont see Trump as being a threat investors , but we should adopt a cautious approach over the next 6 months , and tend towards hold cash for a while rather than Bonds or equities .

My primary reasons are two issues , the Fed increasing interest rates resulting in adjustments to Bonds and a flight from equities , and secondly China which has been on a slow -motion train-wreck into a recession

Neither of these issues are connected to Trump right now , the risks have been in play for about a year , Trump has not even taken office.

He may be the catalyst that speeds up the events of concern .

Somehow I doubt it , but when they happen ( which they will ) everyone will blame Trump

They are good links , but ALL of them are assumptions , and no one has a clue what Trump will do or even be able to do

So far he has appointed his family to powerful administrative positions ,and Steve Bannon, and has appointed this guy to dismantle the EPA
http://www.huffingtonpost.com/entry/myron-ebell-trump-epa_us_582ab3e4e4b...

"Don't misunderestimate" him, as G W Bush would say.

The writing is on the wall, most of the other REpublicans, esp the VP are worse than Trump or too cowardly to restrain the guy.

Incidentally, why do you think an interview with Trump is an "assumption"?

Article doesn't really offer much info or solid opinion.
I switched my fund from 100% growth to 100% cash in September - it's easy to do either online or some providers will do it with a phone call.
Unless you are a gambler, can't see why you would seek too much risk until more about US future policy becomes known fact.

Have you seen the DJIA? It will be over 19000 very soon. If you are in one of the aggressive growth funds then you will be smiling in a few months.

You switched from 100% growth to 100% cash and claim it's others who are gambling? My kiwisaver remains ~80% equities throughout, I'd consider attempting to time the market to be the gamble compared to just plugging away and waiting it out (depending on your timescale - I don't expect to access mine for a few decades)

What further information are you seeking? I hope you got advice before shifting your portfolio so dramatically

Hi Craig - I am seeking information we don't yet have - the fallout (or not) from the US elections.
Please don't get me wrong, I do respect your opinions and commentary. However in this case I felt that your article was sitting on the fence without sticking your neck out and offering some real views forward (which is hard to do without the required information).
While Kiwisaver plays a small part in my investments, it is still worth looking after. I KNOW that my fund wont go backwards with a cash fund while the potential for chaotic markets exists. Can you say the same?
And yes, I will change the balance back to more risk in the future!

At the risk of being wrong and ridiculed like so many "experts" who get predictions wrong, I see Trump as being good for America and equities in the short term but disastrous longer term assuming of course he survives his first 4 year term and then re-elected.

I feel the US debt levels will spiral out of control with the focus being towards spending and while certain sectors of the market will prosper ultimately it will be like a house of cards and come crashing down.

Trump needs to have some good advisers in his ear but I can't see him taking advice from anyone except family or a few trusted people who he can bully.

We have to also keep in mind we've been in a massive bull run for the last seven years and I don't see this continuing during Trump's reign. I don't necessarily see Trump as being the catalyst for a market correction but rather a combination of past excesses finally catching and biting the US.

Having said all this, I'm not shifting my own KiwiSaver away from the current aggressive position as I have 20 years until retirement and am not worried about the markets.

 

Now that's an opinion, and one I agree with. I also predict massive QE in the US during this "spend to save" type approach while Trump is busy making America great again.
I have a couple of decades before I can access my Kiwisaver, and it has done very well over the last few years with the bouyant market. Perhaps I am being overly cautious, but see no harm in removing the risk (I currently see as unacceptable) to these gains.
Most of my investment is in long term residential property holds which have boringly proved to give excellent returns, but are not so liquid as equities.
I feel sorry for the future of the "common American" if the guy they voted for turns out to be as much of a turkey as I suspect.

A few words from an expert who realised tangible results for himself.

Trump policies also appear to favor the repatriation of trillions of dollars of foreign profits at extremely low cost under the logic that the money will be spent for investment here in the U.S. Doubtful. The last time such a "pardon" was put into law in 2004, no noticeable pickup in investment took place. Of the $362 billion that earned a "tax holiday", most went to dividends, corporate bonuses, and stock buybacks. Apple or any other large U.S. corporation can borrow the money they need here in the U.S. at historically low interest rates to fund investment. A few have, but over $500 billion annually in recent years has gone to the repurchase of corporate stock and the increase of earnings per share, instead of earnings and GDP growth. Why would they need to repatriate anything for investment in the real economy? Read more

Like most capex, the US infrastructure spend will be uncertain in result for quite a long time. It'll ensure a huge cash deficit, a "risk on" environment and increased risk premiums and lead the Fed to decrease rates. I wonder they will stay pretty much flat as inflation increases meaning inflation benefitting and reliable yield assets will still be the only place to by - the assets getting marked down at the moment.

Not much - they've shoveled billions of their kiwisaver into houses.

To quote Otto von Bismarck, God makes special provisions for the insane, drunks and Americans. Maybe the alignment of Congress, Senate and Trump will give the sort of stimulus which will break the world out of the current weak growth, be good for all of us, and then they ditch the turkey after four years. Whatever economic outcomes, I can't tolerate his bigotry.

since bigotry is an "intolerance"....
this had me smiling... I appreciate the subtlety.. of your intolerance of his intolerance...!!

I think Sarah Palin, will balance out that stimulus, very stimulating choice.

Yes the lunatics sure are running the (Trump?) asylum , America is currently doing OK economically with the help of 20 trillion debt, adding more seems a bit pointless.
Still, with Kiwisaver you have to be diversified.

What irks me is he delusional New York Times and others who claimed Trump would never win are trying to project to gullible readers a future they do not and cannot possibly hope to know.