US Election Result

Donald Trump is the President-elect despite perceived poor performances in the televised debates and pollsters predicting a Clinton win. As well as the presidency, the Republican Party has control of the Senate and the House of Representatives, though its majority in the Senate is not sufficient to prevent the Democrats from impeding some proposals.

This article looks at the immediate reaction to Trump’s victory and what the possible implications could be.

Had Clinton won the presidency, then we could have expected a relatively smooth transition from one Democratic Party President who struggled to get legislation through the Republican Senate and the Republican House of Representatives, to another. This “as you were” outcome has been scotched and in its place comes a president with an agenda of change, and the political mandate to push much of it through. That said, how much of what was pledged on the campaign trail will translate to actual policy remains to be seen.

Market reaction

Trump’s unexpected win sent stocks, bonds and commodities into turmoil. Many market participants had to adjust the investment allocations that they had made in expectation of a Clinton victory, but there was also a degree of panic leading to exaggerated price moves.

To begin with, there was a sharp removal of investments from higher risk assets, such as equities, to lower risk ones, such as gold and government bonds. However, the President-elect’s victory speech was delivered in a calm and respectful manner, from which investors and traders took some solace, leading to a fairly quick partial recovery in the appetite for risk. Within a matter of hours, benchmark stock indices in the UK had recovered their losses while those across Europe had stabilised at relatively modest falls in the region of 1.0% to 2.0%. At the same time, the increased demand for US government bonds and gold fell back somewhat.

What now?

The election result has brought a degree of uncertainty over the short-term as we wait to see who the new President selects for his cabinet and close advisers. As these appointments are made, they will provide an indication of, for example, the approach towards international trade negotiations as well as the leadership of the Federal Reserve (“Fed”, the US equivalent of the Bank of England). Trump has been critical of the Fed, accusing it of leaving interest rates too low for too long in favour of Democratic Party politics. Janet Yellen is the current incumbent and her term is due to expire in February 2018, but it would not be hugely surprising if she were to resign her post before then.

For now, market participants are weighing up key policy areas some of which could be positive for the US economy. Trump has pledged to spend “at least double” Clinton’s proposed $275bn on infrastructure while concurrently implementing broad-ranging tax cuts. The latter include a one-off moratorium on US companies repatriating profits being held in lower tax environments overseas. This proposal involves making a 10% tax charge on profits moved into the US which would, if successful, provide a boost to tax revenues and also to the value of the dollar relative to other currencies.

However, Trump’s proposals are generally seen as being inflationary over the medium-term (i.e. two to five years). Firstly, it would appear that a substantial increase in borrowing would be required to finance the proposed fiscal stimulus, thereby pumping new money into the economy. Secondly, Trump’s immigration policies are likely to reduce the availability of cheap labour, which would put upward pressure on wage costs.

Interest rates

Despite the medium-term outlook for inflation being one of rises and the need for higher interest rates, the immediate-term outlook is less certain. Yesterday, market prices suggested that there was an 84% likelihood of US interest rates being raised in December. Today that dropped to 50%. While the decision-makers at the Fed will no doubt state that their focus is on market data, they will have to keep an eye on politically generated market turbulence.

Winners and losers

In the meantime, it would appear that there are already some winners and losers. The pharmaceutical sector has rallied on learning that it appears to have avoided Hilary Clinton’s proposal to increase regulation addressing what she considered to be excess profits. At the same time, there has been a muted boost to perceived “haven” assets and currencies such as gold, government bonds, the Japanese yen and the Swiss franc. Swiss stocks are trading at around 1.0% up at the time of writing, but the higher value of the yen is seen as being detrimental to Japanese exports and is likely to push the country’s stock prices down.

In contrast, the bigger losers could include countries and companies that trade internationally with the US. Trump has said that he wants to axe the Trans Pacific Partnership (a trade agreement among twelve of the Pacific Rim countries), reduce Chinese steel imports and curtail the trading treaty with the rest of the Americas, namely the North American Free Trade Agreement. The last of those three points deals a second blow to Mexico from the election result. Trump has pledged to repatriate several hundred thousand illegal immigrants a year, a number that is likely to be dominated by Mexican workers thereby simultaneously increasing that country’s social-cost burden and decreasing the money that is being sent back by expatriates.

What does this mean for investments?

The implication of all of this on investments in the immediate term is minimal. Trump will not be sworn into office until 20 January 2017. Once in place, it will take time for his measures to be transformed to legislation and then implemented. Thereafter it’s largely a question of how he and his team approach international trade, and how quickly the new fiscal measures are taken.

While the US is the UK’s largest single customer for exports, the UK’s economy is likely to be influenced more by Bank of England decisions and EU Exit considerations. Elsewhere, we are monitoring the longer-term implications for stocks and bonds, especially corporate bonds and regional variations in stocks. This will enable us to take opportunities to buy assets that we consider to have fallen beneath their fair value and which are compatible with our investment strategy, while also adjusting for US and international economic conditions as the situation develops.

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