A Huge Win for the Donald. 2016 has turned out to be annus horribilis for establishment politics and politicians as well as pollsters who have repeatedly underestimated global populist discontent, which discontent found an unlikely champion in the US in a billionaire prone to tweeting late into the night. Perhaps even more unexpected than the election result was the reaction of the capital markets subsequent; huge losses in the futures markets were quickly reversed and all facets of a “reflation” trade came on display: small caps, cyclicals and financials up, bond yields up and the dollar up. While the President-elect would probably like to take all the credit for the animal spirits awakened, in reality, the US economy was already showing signs of life and, at close to full employment, wage/inflation pressures were being felt even before the election.
Global property securities produced a 5.0% total return in 2016 despite the fourth quarter pullback as bond yields rose globally. US Interest rates had been gradually rising since late summer, but spiked in November following Donald Trump’s surprise Presidential win. His victory, together with a unified Republican Congress, has lifted optimism as now seen in the NFIB Index. The Trump administration has an agenda that includes tax reform/cuts, regulatory reforms and fiscal stimulus. Independently, the Federal Reserve has signaled that interest rates are likely to rise in 2017. With the post-election surge in bond yields spread across the globe, a rotation away from yield/defensive investments to cyclicals is underway. While real estate securities outperformed bonds, they lagged equities by a wide margin for the quarter and full year.