First Eagle Investment Management insights for the month of November 2016; titled, “After The Presidential Election.”
This morning’s election results once again drove home the futility of human efforts to predict the future. A majority of polls, political pundits and investment markets agreed that Hillary Clinton would be our next president, but they were wide of the mark. This same pattern was visible in June, when polls, markets and pundits were caught flat-footed by Brexit. The lesson here is one of humility. Complex events cannot be predicted with confidence, and, in our view, this is as true in the investment world as it is in the political realm.
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First Eagle Investment Management
Last night’s election news prompted a wild swing in US equities, with the futures market at one point indicating an 800-point drop in the Dow-Jones Industrial Average. However, by this morning, the Dow actually opened with a small gain. Looking further into the future, we cannot be certain how markets will react to the advent of the Trump Administration. With control of the House and Senate remaining in Republican hands and the potential for additional Supreme Court nominations, Trump may have considerable latitude for action. After an initial period of uncertainty, the markets may need to digest an increase in infrastructure spending, tax reform, and the potential repeal of Obamacare. The response could be unpredictable: It might be rational for high equity valuations to decline, but if the focus shifts to fiscal easing and pro-business policies, it’s also possible that the dollar and equities will rally.
Rather than being an isolated event, Trump’s victory resonates with the pendulum swing to populism and nationalism that we are seeing globally—the same trend that manifested itself in Brexit. The world seems to be moving into a space that is disorienting for markets. We respond to this trend not by attempting to predict the markets but, instead, by readying ourselves for the unexpected—positioning ourselves for resilience through bottom-up stock picking.
We focus on buying stocks that are trading at a discount to our estimate of their intrinsic value. If today’s election outcome creates windows of volatility, we will strive to take advantage of these opportunities, one stock at a time. In the current environment, with equity valuations relatively high around the globe, we sometimes liken ourselves to miners working in low-grade ore. There are precious stones to be found, but they are few and far between, and a great deal of labor goes into separating what is valuable from what is not.
Some markets have been volatile today. The yen strengthened on news of Trump’s win, as it did after the Brexit shock, but it subsequently weakened. A decline in the Mexican peso impacted the Mexican sovereign bonds in our portfolio, but we believe the valuation case for the peso remains good. Gold, which we hold as a potential hedge against market dislocation, rose in value when equity markets were down but later fell as the markets recovered. Long-term government bonds sold off during the day, likely because of expectations that future fiscal policy will spur inflation.
Continuing on our steady course, we strive to create an all-weather portfolio built for all market environments. We have made no changes in our strategic direction following today’s election results.
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