The second Trump presidency promises to be one of sweeping changes, affecting everything from trade to energy and diplomacy. To thrive during what looks to be a turbulent period for the global economy, high-net-worth (HNW) individuals should opt for a defensive investment strategy that minimises risk, uses innovative new tools such as AI to anticipate shocks, and outperforms the market during downturns.
Resilience to risk
HNWs should select asset managers that are appropriately preparing for this period of volatility – taking advantage of the opportunities while minimising risk.
Much of this will rely on the ability to anticipate for events, gauge how they will affect the market, and respond dynamically. Technology will play a crucial role – AI models can interpret huge volumes of market data and textual information to give asset managers a by-the-minute picture of the market; forecast future conditions; and even give recommendations on entries, exits, and allocations.
These tools have been shown to significantly outperform traditional forecasting and risk management techniques – it’s no surprise, therefore, that over 90% of fund managers are now incorporating AI tools into their decision-making.
AI and genetic algorithm-powered tools will become all the more vital in the second Trump era, where market shocks and their second-order effects as a result of his policies will often be hard to predict or respond to. A foretaste of this could be seen in the election itself, where the two likely scenarios – either a clear victory for either candidate or a drawn-out process lasting for days or possibly weeks – would each call for radically different responses from asset managers. In this case, AI-driven models, such as our MoSAIQ strategy, were able to act quicker on the available information and ride the ensuing rally in the equity markets.
On the defensive
Tech-powered forecasts aside, a number of big factors are pushing asset managers and family offices towards a more defensive, sector-agnostic strategy. For one, the Federal Reserve is now taking a more hawkish stance on rates as inflation starts to rise once more. The rate cut in December is evolving more uncertain, more disappointing prices data could shift policy back to scenario one.
The outlook for Treasury Bonds remains similarly uncertain. These saw a drop after the election and are now showing warning signs, with the 10 year Treasury now yielding 4.5% and approaching from the 5% psychological level. The US bond market expects the policies of the Trump administration to be inflationary, with measures like tariffs and stricter immigration controls raising the costs of production. JP Morgan and Goldman Sachs have predicted that these policies will push inflation up by anywhere from 2.5 to 3 percentage points by 2025.
The Trump administration’s foreign policy also represents a significant point of uncertainty. President-elect Trump has promised quick action to end the conflicts in Palestine and Ukraine – which will of course have a significant effect on global bond and equity markets. The exact shape of these settlements will, however, depend on the back-and-forth of diplomatic negotiations, which are of course very hard to predict.
Asset managers and family offices should respond to these developments with a sector-agnostic strategy that focuses on individual stocks with significant mean reversion potential following healthy drawdowns. A sector-agnostic posture will allow managers to hedge against, but also take advantage of, the various shocks and policy changes that the second Trump administration is likely to bring.
As a result, traditional options like the Magnificent Seven equities will be insufficient as a hedge against uncertainty, and managers should now look further afield. Real diversification is the order of the day, and HNW individuals should opt for managers that appreciate this fact.
Achieving true diversification
Once again, new AI tools can help implement this strategy on behalf of HNWs. AI and other data analytics tools can help managers design global strategies with low correlations to traditional bonds and equities. For example, the MoSAIQ strategy uses live data, as well as over 60 million historical market data points, to forecast future trends and dynamically hedge against them. As of end of August 2024, MoSAIQ has had an +18.37% annualised internal rate of return (IRR) since 2019, with close to zero correlation with the S&P 500 – protecting clients’ wealth during downturns and shocks, while also significantly outperforming other benchmarks and indexes.
The success of MoSAIQ, and similar strategies, can be seen on a small scale in the Bank of Japan’s recent cut to interest rates, which sent the Yen tumbling and caused a downturn in the Japanese equity market. Models which could anticipate and predict the market dynamics resulting from this outcome – which was not at all obvious when the Bank announced its decision – were able to rapidly reposition themselves to shield clients’ assets.
Unlike the other global shocks of the last decade, which have tended to produce a uniform downturn, the second Trump era looks to be one of opportunity as well as turbulence. For HNW individuals looking to protect their wealth, the best strategy will be one that is prudent enough to navigate uncertainty, but also agile enough to take advantage of the opportunities that sweeping policy change will bring.
1. https://www.hedgeweek.com/over-90-of-alt-fund-managers-using-ai-for-risk-and-compliance/
2. https://adv.portfolio-adviser.com/analysis-bond-market-scepticism-on-trump-victory/
