The Lowdown on Markets to 11th November 2016
World Markets at a Glance
In this week’s issue
- Donald Trump triumphs in the US presidential election after lagging in the polls.
- This result reverberated around the world giving the markets a few days of volatility.
- We have seen two election shocks this year with Brexit and the US presidential election.
- As the reflation trade swept through markets selective equities and base metals rallied.
- Government bonds begin to price in the prospect of higher inflation and interest rates.
- Global equities remain the asset class of choice but you will need to embrace volatility.
“Trump wins the US presidential election igniting trade frenzy in markets”
The unprecedented presidential election race has finally come to an end and as we saw in the European referendum the result was unexpected even if you were unsure as an onlooker. This has been a bitter US presidential campaign with both Clinton and Trump trying to destroy each other’s professional and personal status to become the 45th elected president of the United States of America, and for Hillary Clinton the first lady president in American history.
After a brutal US presidential election campaign, which had left Donald Trump lagging in the polls, he bucked the trend and went on to beat Hillary Clinton. This shock result reverberated around the world’s financial markets, firstly sending the Asian and emerging markets into a tail spin, followed by a pullback in the European markets as they tried to speculate on what this would actually mean for both the worlds political and financial landscape. Logically, safe haven assets such as US treasuries and gold were beneficiaries to the initial sell-off. However, as the political journalists, and financial analysts around the world began to unravel this amazing result the markets then began to recover.
Unequivocally, Donald Trump’s victory was partly achieved by him focusing upon the populist voters, focusing upon some of the more sensitive issues, and of course, this “vote for change” is becoming more apparent given that we had a similar opinionated outcome from the Brexit vote. Clearly, this will be of concern to some of the governments and politicians around Europe given that they will be holding some very important elections in 2017, with arguably Germany’s Chancellor, Angela Merkel, needing to hold on to power in her country and perhaps more importantly to try and keep the fragile European Union together.
Undeniably, Trumps victory does present some significant reservations as to the longer-term outlook for the US economy, and the markets, but over the shorter-term, their government policies, and economic activity, is likely to prove positive. Indeed, the president-elect, and House Republicans, do have some ambitious tax cuts, and reforms, at the heart of their fiscal programme. For instance, cutting corporate tax rates from 35 per cent to 15 per cent, and raising infrastructure spending by at least US$500 to US$1.0 trillion, both of which will be positive for the US economy. Similarly, his plans to incentivise US multi-nationals to repatriate the cash they have amassed overseas, with proposals to simplify tax codes and cut top rate of income tax could also be very stimulative.
“Trumps victory does present some significant reservations as to the longer-term outlook for the US economy”
Equally, given that the Republicans will be controlling the Senate seems to suggest that a loose fiscal policy might be considered late into 2017 and possibly into 2018. It is also likely that there will be some objections in the House over some of these proposed policies, especially the enormous fiscal package surrounding infrastructure, consequently, some uncertain times are being predicted.
Whilst on face value many of these policies could actually boost economic activity over the coming years, the real issue will come from Trump’s pledge to increase trade protection and reduce immigration meaning that these sorts of policies could weaken off US economic growth and increase inflationary pressures. Clearly, Mexican and Chinese imports seem to be high on the Trump agenda, which could then undermine relationships, especially concerning his pledge to levy a 45 per cent tax on Chinese imports, which in turn, could then kindle trade wars, at a time when global trade appears to be experiencing a structural decline.
This could halt any decision by the Federal Reserve Bank, chair, Janet Yellen, to announce any interest rate hike this year; however that question will be resolved in mid-December at the last FOMC meeting of the year. There was pre-election talk that if Trump were to win the presidency then Yellen’s position would come under the spot light. Indeed, Yellens term is up in February 2018, and whilst it is unlikely that President Trump has the ability to remove her before that date, it is doubtful that he would re-nominate her; therefore it will depend on whether she decides to step down before her term expires.
Likewise, he said before his election victory that he would abolish Obamacare and replace it, but since being elected he has indicated that he may not repeal, signifying a complete U-turn from his original comment. This is what makes the markets nervous about the new elected president, the uncertain direction around important issues.
“The election of Donald Trump does represent a shift in US economic policy”
Therefore, as global investors what can we expect from a Trump presidency? Probably more growth and rising inflation, along with higher bond yields, which in turn, could lead to a stronger dollar. In that scenario we are likely to see domestic orientated companies prosper better than some of the global exporters, that might suffer from the stronger currency, but I would hasten to add, not in all cases. This in turn, could lead to improved corporate sales, but mixed prospects for profits, whilst the Federal Reserve Bank will try to normalise interest rate policy to combat any chance of excessive inflationary pressures building up and destabilising the economy.
Regardless, of whether Clinton or Trump had won the US presidential election no incoming president wants to be responsible for a collapse in confidence, particularly an aggressive sell off in risk assets that could eventually destabilise global stock markets. However, the election of Donald Trump does represent a shift in US economic policy given his spending plans, which is likely to see inflation rise, change the composition of the Fed, and influence the long with standing bond bull market.
Knowing that we are in the second longest bull market in financial history, these populist political changes that are becoming more evident as elections throw up surprising results need to be mindful of leadership and government changes, alongside monetary policies, however that being said, if you are a long-term investor, investing in good quality companies that have strong balance sheets, cash flow, and rising dividends, your portfolio should do well over time. Unfortunately, there will be times when volatility rises, and markets react to global events, which should not deter you, unless you are not a long-term investor which means that you should be asking yourself the question of whether you should be in the market.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .