As President Donald Trump prepares to meet with Finnish President Sauli Niinisto in the White House on Monday, a portfolio manager at the Baltic state's largest pension fund has told Bloomberg that he will be trimming exposure to US stocks. The reason? “It seems as if there is no president in the US.”
Risto Murto, chief executive officer of Varma Mutual Pension Insurance complained that Trump’s response to the attack in Charlottesville Va. demonstrated that he is incapable of governing the world's largest economy, and that it appears the US is more or less running on autopilot.
The reason for Murto's concern: as the financial crisis showed us, when there is trouble in the US, it runs the risk of spreading to the rest of the world. Musto also cited Trump’s seeming inability to work with Congress as “particularly worrying,” given that it threatens to disrupt the implementation of the Trump economic agenda. Hoped-for tax cuts and infrastructure spending helped push US stocks to record highs in the wake of Trump’s inauguration.
“’It seems as if there is no president in the U.S.,’ Risto Murto, chief executive officer of Varma Mutual Pension Insurance Co., said in an interview in Helsinki on Wednesday. ‘If I look at what is the moral and practical power, there is no longer a traditional president.’
The unorthodox start to Donald Trump’s presidency - dominated by Twitter outbursts that have included nuclear saber rattling with North Korea and a defense of white nationalist protesters - has turned the U.S. into a source of global political risk. The legislative program that many investors had hoped would support economic growth looks to have stalled, and Murto says Trump’s apparent inability to work with Congress is particularly worrying, given the global ramifications of decisions made in Washington.”
Varma reduced his fund’s equity weight by 5% in the second quarter, before the recent pullback in US stocks, by cutting a chunk of its US-stock holdings, according to Bloomberg. Varma has apparently listened to Jeffrey Gundlach, T Rowe Price, and a host of others who have warned about a selloff in the coming months. To this end, Murto has increased his fund’s cash holdings, preparing to seize upon any “opportunities” that present themselves in the near future. The fund is also using derivatives to hedge its fixed-income position in anticipation of further interest-rate hikes from the Federal Reserve.
Of course, another reason for selling was to lock in profits after “a very good run in equities.”
“Varma reduced its equity weight by 5 percent in the second quarter, mostly by cutting U.S. stocks. It’s now holding more cash and is ready to jump on opportunities as they arise. The fund has also shortened the duration of its fixed-income investments using derivatives positions to prepare for higher interest rates.
Some of the reduction in U.S. stocks has to do with realizing profits after “a very good run in equities since February 2016,” said investment chief Reima Rytsola. “It’s natural that it will halt a little bit.” The “U.S. economy is still doing ok,” he said. But the bottom line is that ‘we are worried.’”
Furthermore, Varma worries that Trump has already squandered whatever good will he had with Congress, raising the possibility that he may never pass the fiscal stimulus measures that had energized so many equity bulls earlier this year.
“Stocks rallied in the months after Trump’s election win, on anticipation his administration would push through a business-friendly agenda. But the president’s lack of leverage with Congress now leaves his policy agenda - from taxation to infrastructure and domestic policies – ‘totally open,’ Murto said.”
To be sure, Trump’s inability to push through controversial policies could benefit countries like Finland, according to Bloomberg, because it could prevent Trump from fully embracing protectionism.
“One bright spot for trade-reliant nations like Finland is that a stalled Trump agenda means he may fail to push through his protectionist goals, Murto said. Most of Varma’s stock portfolio is in Finnish companies that rely heavily on Asian business. ‘In terms of direct exposure, the bigger news to us is that China is accelerating,’ Murto said.”
Then again, if recent fund flows are any indication, Murto’s investing thesis has failed to account for one of the most important factors influencing global equity valuations: Central bank intervention.