Is the US presidential election result Brexit plus?

The theme of political disaffection influencing world politics now has another telling data point; so what does the election of Donald Trump to the White House mean for investors and what are the potential economic and financial impacts of his upcoming presidency?

While we are well aware that many readers may have a strong dislike of Trump, and in particular some of his social views, we feel that it’s important to focus on the potential economic and financial impacts of his impending presidency. Most importantly, while there are a number of things to watch out for over the next few weeks, it’s important not to overreact – there is still more than two months until the actual inauguration and the President’s ability to affect the overall economy is quite constrained.

World stock market reaction has not reflected people’s perception of greater global risk and uncertainty

The unseemly speed that stock markets recovered their losses and turned these to gains is, we think, more likely a measure of prior positioning than a sudden conversion to Trump economics. As with Brexit, in the run up to the actual election, the trend in polls worried market participants into buying portfolio protection. The high levels of cash sitting on the sidelines looking to ‘buy on dips’ and the effect of closing out these hedges was sufficient buying to reverse the initial knee-jerk index losses.

Of more interest and potential concern is the reaction of the US Treasury bond market. The 30-year ‘Long Bond’ yield rose by almost 10 per cent. This seems to be in anticipation of more debt issuance from a Trump government that is expected to increase deficits to fund infrastructure and urban renewal, and the subsequent increase in inflation that could result.

Trump will likely impact oil, urban renewal, infrastructure and pro-business policies to support jobs

In October, Trump outlined his 100-day action plan to “Make America Great Again” as a “contract” between himself and the American voter, which he says “begins with restoring honesty and accountability, and bringing change to Washington1 but notwithstanding this, Trump, and for that matter the Republicans, are supporters of the US drive to be independent of the international oil producers. Lessening restrictions on fracking and building the Keystone Pipeline should increase US oil production and keep a cap on prices.

Some commentators have pointed to Trump’s position on global warming and coal generation as a reason to worry about renewable energy, but we think this is overplayed. The renewable energy business is a sizeable employer that pays well above minimum wages (more people work in solar than in coal mining), the economics of solar work independently of subsidies, and clean energy is still very popular. In our view, coal is at risk from LNG generation given Trump’s support of fracking and a general desire from voters for cleaner energy, not from the renewable energy industry itself.

Urban renewal was a focus area in Trump’s campaign and he polled well in those areas. We expect him to follow through with this as it has broad bipartisan appeal and can create jobs and growth. Similarly, with infrastructure spending, both sides of the political divide have promised this. This will likely be slow to be initiated but positive for the US economy.

Promises of fiscal stimulus in the medium-term, the potential to protect US industry, and lower corporate taxes bode well for domestically-focussed mid-market US companies. Corporate tax reform was also on the Democrat agenda, again indicating a measure of bipartisan support for the measure.

The global impact is much more difficult to call as the President has more power in this area

We anticipated US efforts to disengage from global policing duties to continue even under a Clinton administration, and we expect it to accelerate under Trump. The effect of an accelerated US disengagement from security ‘duties’ is difficult to predict, especially in the Pacific region. In any event, geopolitical risks have increased, but we see this as an extension of an already anticipated risk. As an aside, it seems that Australia’s defence policy will need a serious rethink, reliant as it is on the US.

Again in light of Trump's above-mentioned “contract”2, we also expect that international trade accords such as the Trans Pacific Trade Partnership will not survive. What is less clear is what the follow through from election rhetoric will be on China trade. For most emerging markets, even with a degree of US protectionism, a strong US economy is generally a good thing. In those markets, we generally recommend investors consider investments where local demographic drivers are strong and valuations are cheap – this means investments with strong local demand, which is a natural protection against trade policy volatility.

If you’re an investor, it’s important not to overreact in relation to your investment portfolio

The President’s ability to affect the overall economy is relatively limited, but watch out for the key Trump appointments to positions such as Secretaries of Treasury, Defense and State. Conversations with our network lead us to think that Trump will be a more chairman-like President than a hands-on CEO. The first indicator of this we think will be in his key appointments. Will they be ‘sensible’ nominees with the fingerprints of Pence and Ryan on their nominations or are they left field, unconventional surprises? The latter will increase our level of uncertainty.

It’s worth noting that inflation expectations are rising, and consequently we think the US Federal Reserve will raise rates in December. Global bond markets may struggle, in which case, real assets will be favoured. Consequently, the US is likely to run larger deficits and increase fiscal stimulus, which will likely be good for the US economy. Right now, people’s perceptions are that risk and uncertainty have increased, despite market reactions, and as such, pricing in major stock markets may not sufficiently reflect the level of risk we face.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Patrick Broughton

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With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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