HOW WILL TRUMP IMPACT THE MARKETS?
The Brits have Brexited and now the Americans have been witness to the biggest political coup in American history, but what does it all mean? In both cases the result up-ended the polls and most expectations, resulting in heightened uncertainty and a shock to markets. With the dust by no means settled on the result from the US it is difficult to draw firm conclusions but we outline our initial reaction below.
- The good news is that Hillary Clinton will not be President, ever. The bad news is that Donald Trump will be, and he has been given a clear mandate with both the House and Senate in Republican control. Ultimately the American electorate wanted neither candidate with both showing favourability ratings below 50, lower than Obama’s approval rating.
- This means that the checks and balances in the US political system, powerful as they are, will be rather less than if Congress were divided. Trump therefore has a better chance of implementing his policies, such as they are.
- However, many Republicans neither agree with nor like Trump, so passing legislation will not be plain sailing (how will the puritanical purists and Tea Party activists feel about a surge in fiscal spending and increased debt?). The Administration is also powerful and will provide a serious reality check for Trump. Some, if not all, of Trump’s most extreme policy pronouncements ahead of the election will never be implemented (were they ever intended to be or were they pure electioneering, appealing to the disaffected?).
- Both Brexit and Trump represent, at least in part, a cry for recognition from those who feel disenfranchised and forgotten by the political elite, financially poorer as a result of the unequal distribution of the benefits of globalisation of the past 30 years, with many in the lower echelons of society having suffered real earnings falls over the past decade and more; and perhaps most notably a resurgence of nationalism, itself perhaps a result of globalisation and its resultant huge increase in flows of migrants globally. In the UK, regaining sovereignty (‘take back control’ was arguably the single most striking campaign slogan) underpinned the Brexit vote, while in the US Trump’s ‘make America great again’ left an indelible impression on the electorate. What perhaps marks these and future anti-establishment campaigns out, is that in this era of digital social and political engagement these dissenting voices have found a mouthpiece they previously lacked, and an immensely scalable and adaptive one at that.
- This unquestionably increases the medium term political risks. Will the new administration in the US deliver on the implicit promise of restoring the wealth and well-being of the economically disenfranchised and rolling back the negative effects of globalisation while preserving the positive effects? Can Trump break the log jam of policy making and political dysfunction in Washington? Our suspicion is that this will be immensely difficult; the risk is that there will be disappointment across Trump’s support base, leading to yet more political polarisation and disruption in the years ahead and ultimately a less market friendly government.
- It seems that Trump won the election on a wave of populism rather than on specific policy measures; indeed, the campaign has been notable for the absence of concrete policy measures. This, together with Trump’s unpredictability, has heightened uncertainty in policy making and hence in financial markets. However, a broad outline of his policy announcements suggests that he will increase expenditure on infrastructure and defence, cut taxes and reform corporate taxes, suggesting a significant loosening of fiscal policy. He has also pledged to increase trade protection and reduce immigration. Loosening of regulations in certain industries has also been mooted; the finance, healthcare, energy and telecoms sectors could all be beneficiaries.
- The economic impact of his policy is difficult to assess, given that we cannot be certain about the policy measures which he intends to pursue nor the extent to which they will be implemented. However, the strength of his mandate and his campaign rhetoric suggests that fiscal spending will be materially higher and policy more expansionary, underpinning growth in the US. His protectionist policies are likely to have a negative impact on growth longer term, both in the US and globally. However, as is invariably the case, overseas economies and markets are likely to be more vulnerable than the US. Emerging markets are especially at risk if protectionism results in increased tariffs and reduced trade. The Trans Pacific Partnership would appear to be dead.
- The net result of these policies is likely to be a steeper yield curve and higher inflation. The lows in both yields and inflation have almost certainly been reached in this cycle and the long 35 year global bond bull market is at an end.
- Given the heightened uncertainty the chances of a rate rise by the Fed in December have diminished slightly. However, increased spending and inflation are like-ly to see rates being pushed higher next year, and the Fed might well raise rates by more than their current projections in the medium term. An additional uncertainty for the Fed is the position of Yellen; she came under intense criticism from Trump during the campaign for being overtly political. If she does not resign she is likely to survive until her term ends in February 2018 but we should expect a new Fed Chair then.
- Markets have viewed Trump with trepidation; the initial reaction with sharp falls in equities, especially emerging markets, and rises in safe haven currencies has been marked. Given the heightened uncertainty and unpredictability of policy the risk premium on equities is likely to move somewhat higher. However, it would be wrong to over-react and to make judgements prematurely. Trump’s acceptance speech was more statesmanlike and conciliatory than we have seen at any time in the campaign. Much will depend on the key appointments he makes in his new Administration. It is a reasonably safe assumption that he will drop some of his most radical policies and take a more measured approach as the reality and scale of his task will bring a degree of pragmatism. There is no economic or market dislocation or systemic event arising from the election result.
- We see no reason to reduce growth forecasts in the US next year, but global growth could be somewhat slower in the years ahead if protectionism takes hold. The additional uncertainty will have a negative impact on equity markets but the extent needs to be kept in perspective; it is more likely that Trump’s election will have a bigger impact on certain countries and sectors than on markets in aggregate and opportunities will arise from the expected policy changes. With inflation likely to move higher, a trend already underway as the impact of falling oil and commodity prices falls out of the rolling 12 months numbers, government bonds appear overvalued, despite the rises in yields in the past month. Safe haven assets such as gold have increasing appeal. On balance we believe that markets will drift for a period in the face of the uncertainty and the increased volatility we have seen in recent weeks will be a feature for the year ahead. However, the more extreme concerns about a Trump Presidency are almost certainly misplaced and we see no reason for taking a materially more defensive stance in portfolio construction than before the election.
- It is to be hoped that politicians in Europe will be taking careful note of the results of the US election and UK referendum. There are key elections in the EU over the next 12 months, including the Italian referendum on constitutional reform in December, the presidential election in France in May and German parliamentary elections in August. The wave of populism sweeping the world is unlikely to stop at Europe’s borders and if the rise of anti-EU parties continues at its current pace our attention will shift away from a relatively strong and stable US, albeit with more uncertainty under Trump, towards the future of the EU and in particular the euro. More of that in 2017.
BROAD INVESTMENT IMPLICATIONS
The strong performance of financial assets since mid-February has taken valuations to high levels across many asset classes and to extreme levels in safe haven developed market government bonds. While our medium term outlook coming into the US election was one of continued modest growth across the global economy and accommodative policy from central banks for a long time to come, we felt that short term caution was warranted.
As a result our return expectations have been modest and our portfolios positioned more defensively than earlier in the year. Within equities, we remain well diversified by sector, style, geography and managers, while the remainder of the holdings are spread across specific fixed income and alternative asset classes.
As valuations moved higher in these areas we have also increased our allocations to more defensive and less correlated strategies. A Trump victory is undoubtedly a shock for markets.
Uncertainty surrounding the future direction of US policy is likely to result in heightened market volatility for some time to come. We would not recommend selling into this volatility. We are out-come based investment managers, constructing well diversified portfolios in order to minimise the potential detrimental impact that specific global events could have on returns in order to help clients to stay invested. While some asset classes will no doubt be adversely impacted by the global trend of political disaffection and anti-globalisation, other asset classes are likely to offer offsetting benefits.
As always, we continuously aim to utilise opportunities to increase exposure to asset classes that are unfairly punished by risk events in striving to increase the long-term financial wellness of our clients, whilst making their journey to that outcome as palatable as possible.