The bond market’s reaction to Donald Trump’s unexpected victory was less significant than after Brexit, and may eventually benefit fixed income.
“The surprise win by Trump feels like Brexit revisited,” says Sander Bus, head of the High Yield bonds team. “Initially the polls pointed in the direction of a Clinton win, but as the evening progressed Trump beat the odds, by winning large states. Interestingly enough, Brexit spooked the markets more than Trump’s surprise win: credit markets were much more volatile in June 2016.”
The impact of a new Republican president could be beneficial for the US economy in the longer term – or at least that is what he claims.
“There will be more infrastructure spending and fiscal stimulus. However, Trump’s win does not mean he can do whatever he wants. He will have to negotiate with the House of Representatives and the Senate, and within the Republican Party, not everyone agrees with Trump’s intended policies. This uncertainty should be reflected in credit spreads, but this does not seem to be the case at the moment.”
While equity markets in Asia opened down more than 4% down and US and European stock futures were 2-4% lower on news of the Republican landslide, the reaction in credit markets was more muted, Bus says. European CDS indices Itraxx Main and Crossover opened respectively 5 and 25 basis points higher, before coming back. CDS indices in the US, the CDX Investment Grade and CDX High Yield indices, widened by 5 and 15-20 basis points respectively.
The European financial senior and sub-CDS indices moved in line with corporates, widening by 5 and 15 basis points. US banks responded in a similar way to the mild risk-off sentiment in markets. Underlying interest rates reacted strongly at the market opening but quickly gave up their gains, with 10- and 30-year US Treasury up and curves steepening.
The front end of the curve in Europe and US initially fell, which will have a positive impact on total return numbers for credit markets, especially if the widening in credit spreads is contained. “The impact on our Robeco High Yield Bonds fund, which has a large weight in the US, will be muted,” says Bus. “The beta of the fund is currently around 1, which should help to keep the performance in line with that of the benchmark.”
“The fund has an overweight in Europe versus the US. Our positioning in Europe could be beneficial for the fund, given that the uncertainty of Trump’s policy is largely US-related. The positioning within both regions is more tilted towards higher quality, consumer-oriented sectors. There is a risk that ‘rust-belt’ sectors could rally, since Trump is a supporter of capital-intensive industries, such as steel, coal, energy and utilities. More profoundly, Obamacare is at risk. We have an overweight in US hospitals, so this could have a negative impact on the fund.”
Financial Institutions Bonds
The initial impact on Robeco’s Financial Institutions Bonds fund could be slightly negative, predominately due to the fund’s higher beta of 1.3. Spread widening was muted, however, and risk-free rates went down, which could limit the underperformance. “The positioning of the fund is exclusively in European banks and insurance companies, and in the longer term, we expect the deleveraging trend in the sector to continue, and not to be impacted by Trump’s win,” says portfolio manager Jan Willem de Moor.
Credit funds impact muted
The impact of the US elections on Robeco Global Credits and Robeco Euro Credit Bonds is muted, their managers say. The funds’ betas are close to 1, and initial market reactions triggers buyer interest from Asia. Bid-offers are relatively large and spread moves not significant enough to compensate for transaction costs. “The US election outcome does mean that we could see more populist policies across the world,” warns portfolio manager
Victor Verberk. “This will put pressure on yields in the medium term, which could be beneficial for financials relative to corporates. Both funds are overweight financials versus corporates and long Europe versus the US.”
Robeco Emerging Credits fund is conservatively positioned with an underweight beta of 0.91, a stance that was taken mainly on the back of anticipated rate hikes in the US. The fund has an overweight in Mexico which could hurt in the short term, but this should be mitigated by an overall beta of below 1.
The impact on Robeco Global Multi-Factor Credits will be muted. The fund has a beta of around 1, is neutral on interest rate duration and has an underweight in US dollar denominated bonds, which could be beneficial for performance in the short term. The underweight in energy could be somewhat negative, although it remains unclear how Trump’s policy will play out.
Government bonds see mixed reactions
For government bonds, the Trump victory provided mixed reactions. After an initial rally, US government bonds sold off, while German Bund yields remained flat. Emerging local bond yields rose and emerging currencies declined as the Trump victory will likely have negative repercussions on foreign trade.
“We expect a Trump victory to have little short-term implications for monetary policy,” says Kommer van Trigt, head of the Global Fixed Income Macro team. “A Fed hike in December is still the most likely scenario. With Congress and the Presidency in the same hands, it is more likely that some of the fiscal plans that were announced during the campaign will indeed be implemented.”
“These plans include a reduction in personal and corporate tax rates and a substantial increase in infrastructure spending. How substantial the actual stimulus will be remains to be seen, but the direction is towards more fiscal stimulus. This can have an upward effect on yields via an increase in government debt and a reduced need for monetary stimulus.”
“The positive argument for government bonds is that the Trump victory underlines event risk in politics (as did the Brexit vote), and his confrontational style could increase political risk going forward. On balance we view the Trump Presidency as being negative for bonds and we have reduced duration.”
Going into the elections, the Robeco Global Total Return Bond Fund had an outright short position in Italian government bonds. This position has been closed as spreads have widened to the highest levels pre-Brexit. The Robeco Euro Government Bonds fund and Robeco All Strategy Euro Bonds have bought back Italian bonds, reducing the underweight positions in Italian government bonds in these funds.
Emerging debt may be impacted
Emerging currencies were hit by the expectation of hardened international trade relations under a Trump Presidency and emerging local bond yields also rose. “Looking forward, especially countries with a strong trade surplus vis-à-vis the US are likely to be impacted,” says Paul Murray-John, portfolio manager of the Robeco Emerging Debt fund.
“We have reduced exposure to the Mexican peso in the run-up to the elections. The uncertainties around President Trump’s policies will be challenging for several emerging countries. However, the Emerging Debt fund has its overweight bond exposures focused in countries that either have significant value, such as Brazil and Argentina, or are relatively insulated from President Trump’s trade policies.”
New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.
How Going Green Can Save A Company Money
What is going green?
Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.
The first step in going green
There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.
Making needed changes within the company
After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.
Reducing the common paper waste
Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.
Make money by spreading the word
Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.
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