Bank of America Global Cross Asset Strategy Memo Discussing Trump Election Impact

The Trump inflection Changes today: Add NKY long, 10Y real rate short and CNH put, close forward Kospi vol and Food & Beverage short. We are not making mass changes today. While some of our trades have worked better than others post-election we are broadly happy with the balance. We still want exposure to growth and to own yield where we can but also want to protect ourselves from a further surge in the USD and rates. We diversify our equity long in EM and European yield with a long Nikkei position. It is not the best entry point but we suspect it has further to run on a one year horizon. A stronger USD is good for Japanese equities where it is not for EM, so they complement one another. We add a short US 10Y real rate trade too to protect against rising US yields, as breakevens have already moved significantly. We close our Kospi vol trade (changed view from strategists) and drop the short Food leg of our Pharma/Food trade, reflecting the sharp sell-off in the long duration sectors of late. Summary: Still be long growth and yield but hedge with USD and Rates Year aheads are notoriously tricky to write and almost always wrong. Anyone who wanted to correctly predict the outcomes and how markets would react to them in 2016 did not need so much as crystal ball as a time machine. As investors and strategists we have to make calculations as to the most likely outcomes, where is the best upside to play them and how best to hedge the risks around them. Donald Trump’s election is in our view an inflection point for global markets, starting new trends in some asset classes and extending trends in others. It does not completely change the world though, as the disinflationary and weak growth pressures that have plagued the world since the GFC are structural rather than cyclical. But the shift to fiscal and populism is likely to boost growth and inflation, so it does change the picture to a significant degree. If we are to call it an earthquake it is perhaps a five rather than a nine on the Richter scale. We have to adjust our way of thinking though. The rise in rates and higher USD that we had hedged against now look like they are going to go further. That is going to hurt longer duration assets. So we continue to run our long USD positions and add to our short rate positions (via 10Y real rates). There is risk around trade and geopolitics, which has to make us more nervous of our EM positions. So we diversify our risks by pairing our long EM position with a long Japan position and add a CNH put. But the world is not completely changing. Even in the new order we only forecast 10Y Treasuries at 2.65% and Bund yields at 65bp end 2017. So the hunt for yield will not disappear completely. We still want to own yield, but as we have said of late it cannot be yield for yield’s sake. Yield in equity markets has been safest in the shortest duration buckets, such as Banks and Cyclicals since the summer. We changed our yield basket last month is this direction so we keep it. We stay long AT1’s and in credit we keep our spread trades both in Europe and the US. AND we remind investors of something we said at the start of 2016, be prepared to trade the ranges in markets. If there was one lesson of the last year it was that. When assets get very loved and overbought, sell them, when it is the opposite you have to buy them. Think of buying EM and commodities in February. Think of selling defensive equities and bonds and buying banks post-Brexit. None of us will get that right all of the time, but the Warren Buffet maxim “be greedy when others are fearful and fearful when others are greedy” is particularly useful in current markets. Finally, as cross asset investors think about what can go wrong with your positions and find asymmetric hedges for them if you can. That should be the edge you have at looking across the range of asset classes compared to single asset class investors. We would like to thank our BofAML colleagues who have supported our product this year by providing many such ideas and trust they will continue to do so through 2017. Bankof America 2 Global Cross Asset Strategy - Year Ahead | 30 November 2016 3 Merrill Lynch HOUSE_OVERSIGHT_014434