An assessment of the historic win by Donald Trump in the US Presidential election.
It was always a possibility that Mr Trump would win the US election, despite the worries and fears of market commentators and those in the main economic institutions. Charles Stanley took a cautious approach ahead of the event, recognising that there was likely to be a fall in markets on a Trump victory. Markets dislike the unknown, and fear too much change. The election campaigns had concentrated on trying to expose the weaknesses of each candidate as perceived by the two opposing sides. The Clinton campaign portrait of Mr Trump left many worrying about the decisions he would make in office and his ability to adapt to the pressures and media scrutiny that goes with the task.
The main way that his election could do damage to the economy and to the longer term value of shares is if there is a big hit to confidence. Confidence is a vital factor for economies; with it people go out and buy new cars, new homes and a range of consumer goods and services. With it companies invest and expand to meet the rising demand. Without it discretionary purchases decline, some factory space turns idle, jobs are lost and companies cut investment. If enough people and businesses are sufficiently shocked by a Trump win to stop buying and investing, then the economy could disappoint and markets could fall further.
Mr Trump’s inheritance is an economy in reasonable shape, with modest growth in jobs, incomes, retail sales and property activity. Third quarter GDP growth and profits were stronger, and business outlook surveys have recently improved. His economic programme includes a major stimulus from additional infrastructure spending, and from substantial tax cuts. He also wishes to repatriate large sums of corporate cash sitting offshore for tax reasons. This will provide some offset to the pessimism about his decision-making and other attitudes. On the negative side markets will worry about his possible hostility to trade deals and his wish to impose tougher controls on migration. The initial response is likely to be negative. It could include falls in the value of emerging market shares that are exposed to trade with the USA. Mexican assets and its currency may be damaged by Mr Trump’s rhetoric about building an extension to the border wall between the USA and Mexico. Chinese assets may fall given his rhetoric about China’s approach to trade. Shares generally may fall in value in the short term due to the general worries some investors have over a Trump Presidency.
Charles Stanley does not have political views and does not make moral judgements about those who lead nations. Instead we attempt to predict what will happen to share and bond prices given the decisions of electors and governments. After an initial fall in markets we suspect that negative views will mellow, and more will come to suspect that a Trump Presidency will not tip the US into recession or slower growth after all. There may be opportunities to invest at more attractive prices as a result of a short-term negative reaction to the Trump win. We expect the world economy to continue to grow, and for the USA to lead that recovery next year as it has done in 2016. Whilst the new President may struggle to get through all his programme, the tenor of he wants to achieve is reflationary. This should prove to be better for shares than for bonds. A Trump win is more positive for the energy, healthcare and financial sectors.
So far this year many of our clients have benefited by taking some risk with shares and investments in other real assets. This has happened despite the volatility that politics on both sides of the Atlantic has introduced. We do not think Mr Trump‘s election fundamentally changes the medium term prospect of modest growth worldwide, and rising corporate income. We still recommend that any long term portfolio should seek a higher return through exposure to real assets like shares, despite the risks. Sticking to cash and near cash is not a rewarding way of holding savings, though a necessary one for money that you may need soon or if you cannot afford to see dip in value of your portfolio, even temporarily. We will watch carefully to see the impact on confidence of Mr Trump’s initial days in office. Only if that proved to be bigger and longer lasting would we wish to reduce risk further.
The above article was first published by Charles Stanley on 9th November 2016.