The Trump Effect: What Really Drives Markets?

Romano Sala Tenna

Katana Asset Management

History would suggest that economic and company fundamentals - in particular changing earnings and system leverage - drive markets over the medium to long term.   However, sentiment drives share prices in the short to medium term.   And by short to medium term, I’m referring to the timeframe that most of us seem to focus on.  

So in summary, whilst fundamentals ultimately prevail, sentiment is the primary driver over the timeframe that most of us care about.   

Trump’s policies are re-kindling something that has been lost since the GFC: confidence.   In some respects there are analogues to the rise of the Japanese Prime Minister Shinzo Abe in December, 2012.  Shinzo’s ‘do whatever it takes’ stance generated a level of belief in Japanese investors that drove the Nikkei from marginally above 10,000 when he took power, to nearly 19,500 today – a rise of some 90%.

Of course Trump’s erratic style and lack of diplomacy is also creating a level of fear.  But this is social fear being generated from social policies.   Tougher Immigration, the Mexican Wall, repealing ‘Obamacare’; these will all have an economic impact, but at their heart they are social or ideological policies.   Yes they will create volatility, but their impact on business sentiment is likely to be transient.

Overriding any poor social policy is an economic framework that is undeniably pro-business and pro-profit.   Trump has spent the best part of 3 decades formulating this framework.  He is equipped like very few who have occupied that seat before him, to know what drives business.     Slashing corporate tax rates, reducing regulation and rebuilding infrastructure will have a pronounced impact on business sentiment.  When combined with his push to bring home US manufacturing and expand the energy sector, the ingredients are in place for a period of genuine top-line revenue growth.   And more importantly, Trump’s economic policies – whether they are fundamentally sound or not – will engender a level of confidence and belief that is likely to become self-fulfilling and self-perpetuating over the short to medium term.

Whilst some of Trump’s ideologies are clearly questionable, investors should stay focussed on the economic policies and not be distracted by the volatility that accompanies the poorly executed implementation of his social programs.  

Romano  Sala Tenna
Portfolio Manager
Katana Asset Management

Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.

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