Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management

Do you solemnly swear ?

23 Jan 2017

Investment Partners

Trump became the 45th US president. He takes office at a time when the political, economic and geopolitical tectonics are shifting fast. Many wildcards remain regarding the deployment of his program, in particular, on tax reform, deregulation and public spending.

This week, various statements on the dollar level, border taxes, or the fate of Obamacare raised further doubts. The funding of key Trump’s measure, the cohesion of the administration and the Congress, the impact of a US reflation abroad were all questioned.

These doubts further weakened the reflation trade. CTAs and Global Macro, the most sensitive to these trends, were both meaningfully down. The other strategies were little affected by lower USD and US yields.

As Trump takes office, analysts and markets remain reasonably optimist on global growth and risk assets (DM equities are seen up +5% in 2017 and US yields up +40bps). They still give Trump’s reflation the benefit of the doubts, but faded half of the initial momentum. Expectations on Europe and Japan are conservative, and EM growth is seen unchanged. They expect global inflation to rise, but they disagree on the European inflation pulse. Firmer growth and inflation would lead the Fed to raise rates - 3 times according to analysts and the dots, 2 times according to markets. Finally, the limited risks currently factored in leave markets vulnerable to surges in volatility.

Hedge funds are more heterogeneously positioned on these trends. CTAs are the most aggressive, schematically “Long Trump and Long Fed vs. ECB”. By contrast, Global Macro favor relative and hedged approaches. Their positions could be summarized as “Neutral- Trump, Long Reflation zones and the dollar”. L/S Equity funds remain underexposed but raised their gross exposure to exploit richer stock picking opportunities. Finally, a decisive deployment from Trump after his investiture would favor more-exposed Special Situations over Merger Arbitrage – and vice et versa.

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