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INTERVIEW: CIBC Atlantic Trust WM On How Investors' Political Biases Can Lead Them Astray

Tom Burroughes

23 May 2017

It is sometimes forgotten that markets thrive on disagreement and lack of consensus. The very fact that people grant different values to material and non-material objects, or indeed time itself , explains why trade and the division of labour exist. Complete consensus would bring market turnover to a halt.

At present, however, there is plenty of disagreement; one area of major dispute as far as economics is concerned can be found among high net worth US investors. That difference is around politics. Since the victory in November 2016 of Donald J Trump in the race for the White House, some investors who are confident in his message about tax cuts, infrastructure spending and deregulation have ramped up their equities exposure, while those who detest Trump and are unconvinced about his agenda are drawing in their financial horns.

Such a situation, while not unprecedented, raises a challenge for wealth advisors who, while they cannot refuse to honor a client’s wishes, will want to counsel an investor into taking a wise course of action. At times of heightened political controversy and strong feelings, the ability of an advisor to put a hand on a client’s shoulder and encourage calm reflection comes into its own.

Eric Propper, president of CIBC Atlantic Trust Private Wealth Management , made this point to Family Wealth Report in a recent call alongside his colleague, David Donabedian, chief investment officer at the firm, which oversees more than $30 billion in assets.

“People’s political sentiments are heavily influencing their investment sentiment,” Propper said. “Clients who are supportive of the president are generally very bullish on the markets, notwithstanding the historically high valuation levels of US equities,” he said. Such investors, he said, think Trump’s agenda will produce a sharp improvement in the domestic economy. On the flipside, those who are unconvinced Trump will deliver and who are concerned, say, about funding for tax cuts and public spending are taking a “very cautious” view on the markets, he said.

It appears that political sentiment has already played a part in both the “Trump trade” seen post-November, with indices such as the S&P 500 hitting the heights, and the more recent selloff, as news stories about accusations and counter-accusations over Trump’s alleged Russia ties led to words such as “impeachment” being thrown around. But it appears that despite some of the noise, there is an underlying resurgence of optimism, even though investors are being told that the US is in its ninth year of an equities bull market, and that such a period is long by post-war standards.

The S&P 500 Index is just below the 2,400 level reached over a week ago, and has marched higher, with the odd pause, since early November. Last week saw a spike in the VIX index of options volatility on US stocks, the so-called “fear index”, and US Treasuries, a classic safe haven, rose in price. Since the start of the year the MSCI US Index shows total returns of just over 7.1 per cent . That contrasts with, for example, the MSCI UK Index of 12.48 per cent, and MSCI Germany, at 16.48 per cent. The MSCI World Index of developed countries’ equities shows year-to-date returns at 9.18 per cent. 

The issues arising from strong political likes and dislikes among investors has been noted before. In 2010, for example, an academic study found that when an investor’s preferred political party was in power, the investor wanted to boost exposure to riskier assets. On the flipside, they took their chips off the table when their least favored party was in Washington. That study was called “Political Climate, Optimism, and Investment Decisions.” It examined behavior from 1991 to 2002, a span that included years when each of the major political parties controlled both the White House and Congress. The authors were Yosef Bonaparte, an economics professor at the University of Southern Mississippi; Alok Kumar, a finance professor at the McCombs School of Business at the University of Texas at Austin; and Jeremy Page, a doctoral student at that institution.

What investors should consider
Donabedian said that in turbulent political times when feelings run high, he and his colleague remind clients to where possible remove their partisan biases; to focus on the underlying economic picture, including company developments, and not be distracted by the daily “noise”.

“The impulse from an investor, if they are fans of the president, is to think we are on the cusp of a rebirth of economic growth and that leads them to be very bullish on risk assets, particularly US equities. Non-fans believe that he brings a measure of instability,” Donabedian said.

One specific action is that if a client is so gloomy about the domestic political/policy situation that he or she wants to dump stocks completely, the firm’s job is to try and moderate such an extreme view, and explain these costs of such a shift, he said.

“We do believe there will be an outcome that does lead to some fairly big change to tax policy that will lead to a better earnings cycle,” he said. Overall, CIBC Atlantic Trust’s position of overweighting  equities has not changed, he said. The asset manager slightly favours small- and mid-cap areas of the market, based on the assumption that faster domestic growth will benefit such areas disproportionately.

Whatever happens, an important message for clients is that they cannot pin their investment views on a specific political outcome, but be diversified and to put their asset allocation in perspective, he said.