Donald Trump’s election in the US prompted a massive sell off in UK Defensive equity companies as riskier asset classes such as Mining and Financials were slingshotted up to the top of the UK Index leaderboard. Losses of up to 5% were suffered by some of the UK’s largest companies whilst their peers in other sectors quickly recovered from the red to trade positive by the end of the session and continued to rally into last Friday. However, two weeks later and the defensives seem to once again back in the driving seat, with companies including British American Tobacco (BATS) and United Utilities (UU.) at the top of the UK 100 today having pared the losses made on November 10.

Why has this change in attitudes come about? There are several reasons that the stark change in fortunes for defensives has appeared at the beginning of this week:

1. Heightened European political risk. This Sunday’s Italian referendum and Austrian presidential elections are pivotal events for the future of the Eurozone. The former carries with it the hopes of the entire banking sector in the EU’s third largest economy, alongside the position of the man who called for the constitutional changes being voted on. The latter could bring about the first elected populist far-right government in Europe, less than six month’s before Marie le Pen tries to complete her father’s goal of a right-wing government in France that began 40 years ago. After Brexit and Trump’s victory in the US, might these events simultaneously become the third and fourth victories for the rising populist movement in less than six months?
2. Is the Trump rally ending? Whilst the immediate aftermath of the US election result saw a monumental rally in equities on increased economic optimism stateside (culminating in several ‘grand slam’ record closes for the four major US indices last week), a fortnight later and the rally seems to be losing its steam. Despite hopes of deregulation for the Financial Sector, an increase in domestic Energy production and the tremendous infrastructure spending promised in his acceptance speech, markets may now be on the turn as Trump’s potential trade policies once again come back into focus. Today, the OECD approved of the fiscal stimulus, but warned that Trump’s protectionist promises made on the campaign trail would  ‘worsen prospects and lower [the] well being of many others.’
3. The possibility of OPEC negotiations failing. The oil producing cartel has become notorious in recent years for over-promising and under-delivering on promises and whilst the confidence of many investors appears to be sky high in the run up to Wednesday’s meeting in Vienna, it appears as though markets are attempting to hedge any shocks should a deal fail to be reached. This is reflected by rallying oil prices offset by both of the UK’s largest Oil companies, BP and Royal Dutch Shell, trading in negative territory. Could we once again be left wanting so much more from the world’s largest cartel?

Might today’s trading foreshadow future market sentiment as we move into the transitional phase of the US Presidential office and with the possibility that crucial political and economic events may yield the market-negative result? Only time will tell. But for the moment at least, the best offence seems to be a strong defence.

Henry Croft, Research Analyst, 28 Nov