Investors waking up to the news Donald Trump has won the US Presidential Election will be feeling a sense of déjà vu. We were all here before on 24 June as markets went into freefall following the Brexit vote.
In the words of Trump himself, a victory for the ‘wildcard' candidate would be Brexit x10 and we are already seeing global markets bearing the brunt of the vote. Asian markets are down up to 5%, with Dow Jones futures suggesting the index will open 4% lower.
Meanwhile, the Mexican peso - the bellweather for a Trump victory - plummeted to a record low in overnight trading. Unsurprisingly, investors are now searching for safe havens, with money flowing into gold (up 5%) and the yen.
A sharp sell-off in risk assets was expected following a Trump victory as warnings were made about the potential ramifications of his radical policies on the US and wider global economy.
For example, Brian Snowdon, senior teaching fellow in economics at Durham University Business School, said a Trump victory could drive the US economy into stagnation and threaten international economic integration.
"In an increasingly inter-dependent world economy, Trump's xenophobic protectionist economic strategy combined with his clear ignorance of foreign policy issues is astonishing."
However, although many investors previously burnt by being on the wrong side of Brexit had shored up portfolios, warnings were made the likelihood of a Trump win, or ‘Trisk' (Trump risk), was not priced in, even as polls tightened. This is not a shock win, but one people thought was possible, rather than probable.
What it shows is the momentum for change driving the Brexit vote has much further to run. In a world where people feel they have nothing to lose and have been left behind by the effects of globalisation, a populist candidate like Trump becomes their voice. They may not agree with everything he says, but at least there is a possibility of change, unlike under status quo candidate Clinton.
Contrarian Investor: The rise of the populists
Other countries around the world will be looking very closely at last night's result, especially Italy which is sent for its own make-or-break referendum next month that could see support intensify for the populist Five Star movement.
Geopolitical risk has been front and centre of investors' minds this year and now looks set to dominate in 2017 and beyond too. Before the election, ETF Securities advised "protecting portfolios from a potential rise in inflationary pressure resulting from growing support for populist political parties across developed markets" and it is these kinds of strategies which investors will now be considering.
However, like with the Brexit vote, much about the longer-term implications of a Trump win are still uncertain and this is what is spooking markets. What really are his policies? Will much of his campaign rhetoric be toned down?
What part will the Republican-dominated Congress play in providing checks and balances to his presidency? What will be the longer-term impact of his tenure on the US economy and the Fed's interest rate path?
It is these questions which will play out over the months and years ahead. Be prepared for a bumpy ride!
