Authorised financial adviser Martin Hawes is urging retail investors to be cautious in the wake of Donald Trump being elected President of the United States.
Hawes, who is also the investment committee chairman of Forsyth Barr’s Summer KiwiSaver, says: “There’s a lot of uncertainty still.
“In fact, it’s probably increased with this, because we don’t know what Donald Trump will do. Choose any one of the 150 promises he made that he contradicted.”
Speaking to interest.co.nz in a Double Shot Interview, Hawes makes the following suggestions to mum and dad investors:
1. Diversify your investments.
2. Be risk adverse. “I’m remaining cautious on my own portfolio. I’m not increasing risk on it yet. I’m not buying any equities yet,” he says.
3. Reduce your asset location in interest rate sensitive markets. Hawes suggests lowering your asset allocation in property and fixed interest or bonds.
Why? Interest rates are on the rise.
Hawes explains “Property depends on borrowing a lot, and the income from property is compared with bonds. So if bond yields are higher, then property yields need to be higher as well. You do both of course by adjusting price.”
What’s pushing interest rates up?
Of all the promises Trump has made, Hawes believes he will be successful in pushing through tax cuts. He has promised to slash the corporate tax rate to 15% from 35%.
“That probably will stimulate the economy, it will probably stimulate companies,” Hawes says, as it will encourage infrastructure spending.
“The United States is probably a bit like New Zealand - overdue for some infrastructure programmes.”
So on the one hand we can expect to see more investment, yet on the other hand tax cuts will lower the Government’s revenue in the short-term.
“Where’s the difference going to come from? Higher debt. America’s going to be borrowing more - probably the US Government is going to be borrowing more.
“So the world is different in the sense that I think interest rates are likely to be higher than what they would have been three or four days ago.”
How much of a drag will protectionism have on a market buoyed by fiscal stimulus?
“I don’t know how that will play out, but if you look at the bond market, [it is] saying, ‘We don’t like this terribly much and we’re pushing the price of US treasuries and other bonds down, and we’re pushing interest rates up’.
“This is a bond play, not an equity play. It is bonds that really moved. Equities have done that, but they’ve thrashed around and really gone nowhere.
“The protectionism thing would be one of the worst things to happen. The big beneficiaries of globalisation are not some fat cats sitting on Wall Street, it’s actually poor people.
“There have been a billion people in absolute poverty over the last 25 years who have joined the lower middle class... They’re no longer subsistence farmers. They’re no longer abjectly poor.
“To go back to protectionism would be one of the very worst things. Globalisation and free trade has been a wonderful thing.”
How will Trump affect the ethical investing movement?
The Trump victory has made winners of pharmaceutical, defence-related and oil and gas companies, and losers of sustainable energy providers and car manufacturers based in Mexico.
Yet Hawes believes Trump’s denial of climate change won’t derail the ethical investment movement the world has had an awareness of for the last decade, but has only just started gaining traction in New Zealand with the proliferation of KiwiSaver.
“I don’t think the socially responsibly investment trend will actually lower all that much at all. People might thrash around to look for suitable investments in that area - it might be a bit more difficult, but I don’t think it’ll stop people,” Hawes says.
He believes there will be a backlash from the likes of those who have taken to the streets in protest against Trump this week.
“Those people can make a statement, I think, by trying to choose socially responsible investments.”
Should Trump’s foreign policy be giving us the jitters?
Hawes recognises Trump is not a dictator, and can’t push through policy changes without support from Congress.
Yet he remains “worried” about his “short attention span”, erratic comments and aversion to being constrained by policy.
“You get something like the Russians marching into Estonia. Estonia is a NATO country. It’s meant to be one for all, all for one. Will he honour that?” Hawes questions.
“Russia, North Korea - these kinds of places will no doubt test him. They’ll give him a prod and see how he jumps. I don’t know how that’s going to work out.”