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Trump, Brexit signal rocky road ahead for investors: Gordon Pape


It’s been a year none of us will ever forget. In fact, historians looking back on 2016 a century from now will probably identify it as one of the most pivotal in modern history.

It was a year that set in motion a train of events that will reshape our world for years to come. At this stage, we cannot know the consequences of all the forces that have been unleashed but we do know they will dramatically change the world and how we make our investment decisions.

On a macro scale, historians will zero in on two game-changing events: the British decision to leave the European Union and the election of Donald Trump as the U.S. president.

Both are related in the sense that they represent a rebellion of the middle class against the established elite in the two countries. Both signal the start of a retreat from the political realities of the post Second World War era into a new period of isolation and xenophobia.

The first shock came with the Brexit vote in June. No one expected the Leave side to win but it did, handily. In doing so, it triggered more than Great Britain’s departure from the European Community.

It was the first shot in what will probably be the eventual collapse of the EU. The second came last Sunday with the defeat of Italian Prime Minister Matteo Renzi in a national referendum aimed at strengthening the government.

With the rise of Eurosceptic parties across the continent, it now seems to be only a matter of time before the EU disintegrates and Europe reverts to a collection of inwardly focused states. That would be a sad end to one of history’s great political experiments but unless something dramatic happens to change the equation, that’s where we are heading.

The second big shock was the election of Donald Trump. We all hope for the best for his presidency but let’s be realistic. Mr. Trump has the potential to be the worst president in U.S. history — worse than Calvin Coolidge, worse than Herbert Hoover, worse than George W. Bush and worse than Andrew Johnson, who succeeded Abraham Lincoln.

Trump is egotistic, narcissistic, reckless and arrogant. He has a hair-trigger temper and a total lack of respect for truth. He’s a bully. Any one of these characteristics would be dangerous in the most important leader in the world. He displays them all.

The next four years are going to be the most perilous and disruptive period we have experienced since the Second World War.

So how do you plan your investments in the context of these unfolding events? With great care. Here are my suggestions:

Avoid Europe. It has not been a good year for European stocks. As of this week, the Stoxx Europe 600 Index was down 7.2 per cent for 2016 and most national indexes were also off. Ironically, Britain’s FTSE 100 was the only winner, gaining 7.8 per cent year to date.

It’s hard to see how 2017 will be any better. GDP growth in Europe is agonizingly slow and unemployment is high in countries like Italy (11.6 per cent), Spain (18.9), France (10) and Greece (23.4).

Add to that the political turbulence that is coming with elections in France, the Netherlands, Germany and probably Italy and the outlook is grim. Europe will be a good place to visit, with an increasingly cheaper euro, but not for your money.

Be wary of China. It’s in no one’s best interests, but Donald Trump appears determined to launch a trade war with China. He has already branded the country as a currency manipulator and threatened to impose huge tariffs on its exports to the U.S.

He has shown a callous disregard for relations with Beijing by breaking a 40-year precedent and speaking directly with the president of Taiwan. All this bravado may play well in Indiana but it will not benefit either the U.S. or Chinese economies. The Shanghai Composite is down 8.3 per cent this year. Next year may be worse.

Be selective in the U.S. American stocks have been on the rise since the election on the expectation of a rollback in financial and business regulations, a tax reduction and stimulus spending.

I suspect the Trump Bump will give way to the Trump Slump once the new president takes office and the implications of his policies become clearer, especially as they relate to trade.

However, some sectors of the economy are expected to prosper under his mandate. One of them is defence, which is likely to see expanded budgets to beef up America’s military presence. One way to participate is through the iShares U.S. Aerospace and Defense ETF.

Invest in Canada. We’re vulnerable to Trump’s protectionist tendencies but it’s not likely we’ll experience any serious disruption in our trade with the U.S., unless his administration decides on a policy of raising the drawbridge and hunkering down in the castle.

In fact, our energy sector may actually get a boost from the new government, since the president-elect has vowed to approve the Keystone XL pipeline.

Pay off debts. The long era of low interest rates that followed the collapse of 2008 is over. The U.S. Federal Reserve Board is scheduled to meet next week and an increase of a quarter-point in its key rate is almost certain. At least two and maybe three more hikes are likely to follow next year.

The Bank of Canada probably won’t move but commercial rates will go higher (that process has already started). This is probably just the beginning, as Trump’s policies suggest more inflation down the road, which will drive rates higher. Reducing your debt will be one of the safest ways to make money during this period.

I realize this is a rather gloomy outlook. Many of my American friends do not share it; some are convinced that Trump will shake up Washington and restore middle America’s prosperity and the country’s international credibility. I hope they are right. I fear they are terribly wrong.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is BuildingWealth.ca Follow him at twitter.com/GPUpdates .

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