Donald Trump’s victory is an event that could one day be looked back upon as a generational turning point in global politics. In this article, we take a step back from the headlines and examine how his election could affect the trends already underway in the US economy, ultimately to determine how investment markets might act over the course of the next 12 months.
Some of the headwinds that face the global economy, such as high private debt levels, appear to be less pronounced in the US than they are elsewhere in the world, although other structural trends such as adverse demographics will continue to weigh on US economic growth for many years. Despite this, our overall stance remains positive on US growth and, therefore, US equities. Rising US interest rates and accelerating economic growth will put upward pressure on treasury yields, but we expect investor demand for income to mitigate the near-term selloff in US bond markets.
We are aware that one of the key supports of asset prices, namely highly-accommodative US monetary policy, is likely to be reduced (albeit we expect Fed rhetoric to remain supportive) and that rising capital costs may weigh on equity market price-to-earnings multiples. We note that the president-elect has suggested that he may seek to influence US monetary policy and this provides a risk that rates could move upward more quickly than the market currently expects. Nevertheless, we see potential for the incoming administration to support corporates by lowering taxes, implementing pro-growth reforms, enacting policies that would provide US corporates competitive advantages, or reducing regulatory burdens and red tape.
Less optimistically, we are cognisant that policies to curb immigration or trade could have broad negative implications within and outside of the US. We see significant risk that global trade could be impacted, particularly as Mr. Trump has already indicated that he will label China a currency manipulator. Given the complexity of global supply chains, the economic impact of trade wars could be extremely damaging. In any case, some companies will be able to benefit from the changes to the economic backdrop more than others and we therefore expect stock selection to be a key contributor to returns over the coming year.
In the foreign exchange markets, we believe the US dollar will remain supported, which should provide a tailwind to US consumption but could also have negative consequences for the world’s other regions. This is particularly the case for the emerging markets, where the holders of US dollar-denominated debt, both corporates and governments, may see their financial positions compromised. Likewise, a stronger US dollar would put downward pressure on commodity prices.
Politically, Mr. Trump’s election victory can be seen as proliferating the ‘populist political revolution’ that was brought to the fore by the UK’s vote to leave the European Union in June. If this boosts anti-establishment political parties’ popularity elsewhere in the world, we could see dramatic changes to the economic and political status quo in the coming months. The first hurdle will be provided by Italy’s constitutional referendum in early December, which could end with the dissolution of Matteo Renzi’s incumbent government, escalating concerns over the longer-term prospects of the eurozone project.
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The article above by Daniel Masters, Investment Director – Head of North American Equities at Brookes MacDonald, was first published by Brookes MacDonald on 22nd November 2016.