The reasons for Trump’s victory will continue to be discussed in the months ahead – the purpose of this market update is to consider the investment implications, as we see them on 9th November 2016.
Reporting on the ground from Washington DC, with the results just in, I can say that very few people anticipated that Trump would win. Trump’s ability to tap into patriotism and a desire for political change in so-called rust-belt swing states brought him victory in the Electoral College despite receiving fewer votes than his opponent.
This result means that the economic and political risks to the US and the global economy have increased from where they were two days ago. Economically, because we have a short-term vacuum and politically because the road ahead is not known. This comes at a very important time, as we continue to believe that all markets (equities, fixed income, developed or emerging) are at elevated levels and appear to be rather expensive.
All indications suggest that it will be a difficult transition from one administration to another. This does not mean that it will be catastrophic or that there will be instability but it will not be smooth.
The difficulty lies in that whilst we know Trump ‘the candidate’ reasonably well, we do not know Trump ‘the President’. Those who do know him say that he will be quite different, but he does appear to be his own man.
He has delivered the Republicans an enormous victory, both for himself (above anybody’s anticipations), as well as a Republican congress, with full control both in the Senate and the House. There is no getting away from the fact that Trump delivered that mandate. He has a lot of power to mould the future projection through his policies and to achieve his goals. It will be interesting to see whether the checks and balances of the president, congress and judiciary will operate. If the system works then Trump will not be able to deliver on many of his pledges.
The global macro-economic trends that are now being acknowledged, in terms of demographics, immigration, technological changes, income and capital distribution, have contributed to the nation’s division. We can’t see anything on the agenda that will bring the divides together from what we know of Donald Trump’s economic agenda, although at this stage we don’t know any policy details.
What is apparent is that he will be domestically orientated in his economic policies. This means stronger domestic economic growth boosted by infrastructure spending and reducing taxes. At the same time, he will try to address the fiscal deficit. These goals appear to be rather difficult to achieve at the same time and we will watch to see what kind of economic advisors he will bring in.
There is also the important question of what is going to happen to the Trans-Pacific Partnership (TPP), which looks to be almost certainly consigned to the dustbin, and the North American Free Trade Agreement (NAFTA), on which he has said he wants to negotiate. Changes in trade policy carry significant risk to the rest of the world, as already seen by the fall in the Mexican markets.
Another matter that seems likely to change is Obamacare, as Trump has been very vocal on this point. However, we don’t how he intends to do it or what will be put in its place. Removing health insurance from 20 million people will not be an easy task.
The key implications for investors over the next few weeks will be who he appoints to his cabinet. We will see a new swathe of people moving in to run the administration and this is something that we must keep a close eye on.
We’ve had Brexit and now a Trump victory and this is sending out warning signs that the upcoming elections and referendum in Europe may also yield unexpected and difficult outcomes. International cooperation and leadership are going to be very tricky and that raises the political risk premium for global markets.
In terms of the short-term economic outlook, it is unlikely that the US economy will change from its current 2% growth.
There was a degree of certainty that the Federal Reserve (the Fed) would raise interest rates in December but this has become questionable due to fear surrounding the markets. However, the markets have responded well so far, partly because there is a view that the Federal Reserve will not raise interest rates in December.
My personal view, which may be slightly different to the consensus, is that if the Fed feels it needs to raise interest rates in December, it will do so regardless. Janet Yellen is in quite a strong position because she is damned if she does and damned if she doesn’t. I think the Fed will be keen to display political independence.
The bigger issue (a bit like Brexit) will be whether this surprising political result and the economic vacuum will lead to corporations and consumers being more nervous and cautious in their behaviour. We saw that this did not hold in the case of the UK, although I don’t think we should draw that as an example.
There are many factors in the long-term economic equation. As of today, one could argue a case for stronger economic outlook due to the domestic policy shift which will be accompanied by upward pressure on inflation and interest rates. We are a long way from this but the markets will start to discount on this basis. However, infrastructure spending, whilst it is greatly needed, takes a while to put in place. We also don’t know the speed at which the tax cuts will take place and from where they will come, and all of this should be considered in the context of a fiscal deficit which has been narrowed but still remains large.
In terms of markets and investment strategy, we have been increasing cash because of the elevated levels of the market and due to a general sense of greater uncertainty. We see little upside for equities from here. The biggest question surrounds emerging markets, previously seen as the value or renaissance trade. If the US becomes protectionist then this will be problematic for the emerging economies which need external trade to grow. We were thinking about investing in the emerging markets with more emphasis but I think we need to stand back and watch what happens for a while.
I believe that fixed income markets will be undermined by the inflationary backdrop that is beginning to emerge. Treasuries rallied quite sharply as a safe-haven trade overnight but we’ve seen that reversed quite quickly. Gold did its job as a diversifier, and if things go wrong in terms of the political dialogue, I think gold will continue to do well.
With regard to currencies, the dollar fell quite sharply then recovered. The US is fundamentally a strong economy. It’s politically changing but it is stable and secure. If we are going to witness a withdrawal or a reduction of the US military from the Middle East and elsewhere, then I suspect the US dollar will do rather well as a safe-haven currency. We were bullish on the US dollar before the election and that position will be held for the time being unless something untoward happens with the transition to the new administration.
We are here for long-term capital protection as well as growth. In the short term, we need to have some protection because of the policy vacuum that now exists. The overriding message from talking to money managers in New York over the last week is the difficulty in making real returns. We need to have more niche strategies to generate the returns required. There is a general concern about the outlook for the markets and the events unfolding will only serve to raise that.
However, in the medium term, the US is not about to detonate economically and I believe it is still a sound destination for investment. Although, we must remember that it is always (of course) at the right price! I would suggest that the election result makes the US relatively more attractive for investment than before the election, relative to emerging and other developed markets, but we need to have more information about future policies, as for sure, they will be different from the last eight years.
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