As you will all have heard by now Donald Trump is now US President Elect thanks to his unexpected win in yesterday’s election. So far the market reaction has been fairly predictable although conditions have improved a little compared to a couple of hours ago. Below I’ve provided a market update and our initial thoughts on the implications of the result
What has happened in markets?
Risk assets have sold off – most Asian stock markets fell around 2-3% on the news while European stocks have opened lower by 1-2%. In the US, S&P futures are currently indicating the market will open around 2% lower. Oil prices are down around 1%, again having opened much lower than this
Safe havens have jumped – ten year bond yields in Europe are generally down around 5 basis points this morning. In the US 10 year Treasuries are fairly flat although at one point they had dived from 1.85% to almost 1.7%. Gold is up around 2% at the time of writing. On the currency side the yen is up around 1.5% in trade weighted terms, a factor contributing to the steep fall for the Japanese stock market this morning (-5.3% for the Nikkei).
Over the next few weeks we think the scenario below could play out until the dust begins to settle on the election
• Risk assets likely to be volatile in the short term before recovering poise, particularly if it became apparent President Trump was going to pull back on or dilute some of his more controversial pre-election promises
• US equities would probably do reasonably well on a relative basis although companies with more of a domestic bias may fare better than companies with big chunks of revenues and profits coming from abroad where fears may abound that trade protectionism could be on the rise with Trump as President
• Higher beta regions such as Asia and Emerging Markets could struggle short term on a relative basis. To the extent that the yen rallies (as a safe haven) then Japan could also struggle short term.
• Government bonds would clearly find support in the event of a Trump win while oil and gold could be expected to be firmer given fears about his approach to foreign policy.
Short term our key messages for clients are
- Expect short term losses and volatility as Trump’s election is digested by investors.
- In common with all such events, selling long term investment assets at such moments is ill advised
- Do not change direction on your investment plans unless your own objectives or timeframe has changed
- Investment markets have been extremely resilient in 2016 – we’ve seen a 10% selloff in January and another steep selloff post BREXIT. Don’t dismiss the possibility that markets could rebound swiftly from this once the dust has settled
What does this mean for the US?
What does this result mean for the medium term outlook for the US? Unfortunately it’s difficult to answer at this stage as we don’t know for sure what policies (as opposed to campaign promises) President Trump will unveil. On the economic front, the impact of a Trump victory depends on the extent to which alters or amends his pre-election promises. Overall we don’t think a Trump victory massively reshapes the medium term outlook for the global economy although moves towards greater protectionism would be a negative for the world economy long term
Below we’ve included our initial take on some of the more investor relevant issues President Trump campaigned on as well as other questions the election raises
1. Possible trade sanctions with China – ultimately trade tariffs with China probably only make US consumers poorer (US consumers are massive importers of consumer goods from China) and is unlikely to lead to wide-scale manufacturing moving back to the US given labour costs are so much higher. Furthermore, tariffs on Chinese goods isn’t going to hurt China that much – exports to the US only accounts for less than 4% of GDP, halving in the last decade. So it’s difficult to see much upside with persisting with this as a policy initiative
2. Tax cuts – the tax cuts proposed for the US (lower corporation tax to 15% and simplify the tax code) would be a significant stimulus for the economy – the Tax Foundation (a US tax policy research organisation) noted in a 2015 paper that these moves could lift long term GDP by 4% and add 700,000 jobs. Once higher payroll taxes and economic growth ‘dividends’ are taken into account though, the tax cuts would still cost an additional $160Bn per annum. So tax would have to be clawed back from elsewhere to make this tax neutral or the proposal could be watered down. We think it’s most likely this would be watered down.
3. Infrastructure spending – During the campaign President Trump spoke frequently about boosting infrastructure spending. If this happened on a large scale it would clearly provide a short term boost for the US economy while also possibly helping US productivity longer term. But as with the tax cuts it remains to be seen how this is financed?
4. Repeal Obamacare – The Congressional Budget Office looked into the effect of repealing Obamacare and found it would increase the budget deficit by $137Bn over the 2016-25 period. Currently the US budget deficit is projected at around $500Bn. So Trump needs to have a good plan in place to avoid the deficit running higher if he wants to get rid of Obamacare
Vital to find a ‘common ground’ with Republicans in Congress
Another key issue for Trump is that the Republicans now control the Senate and House of Representatives, thereby meaning in theory it should be easier to pass his policies through Congress. However the election clearly highlighted just how divided the Republican party is – therefore if President Trump wants to push his agendas through Congress he will have to find more of a common ground with Senate and House Republicans. This will be particularly the case on the issue of trade policy – while Trump campaigned on an ‘anti-trade’ platform, in general the Republican party has a ‘pro-trade’ stance. In the interest of getting things done, Trump could therefore have to dilute some of his policies
Does this prompt changes at the Fed?
This is a possibility as President Trump has been very critical of Chair Yellen at the Fed. Her current contract runs until February 2018 but this is one topic to watch over the next few months. Shorter term, we think it’s more 50-50 now whether the Fed hikes interest in December or not. If markets stabilise quickly an interest rate rise could still happen.
The full impact of the election results will only become clearer over the next few months but so far investors seem to be taking the surprise result in their stride.
Tom McCabe, Global Investment Strategist – 9 November 2016