9th November 2016 at 1:17pm
Originally from Standard Life Investments’ Global Strategy Team.
Although the final votes are still being tallied, Donald Trump has won the Presidential election. The Republicans also retained their majorities in both the House of Representatives and the Senate.
Trump’s election introduces significant uncertainty to the outlook for government policy, economic activity and the Federal Reserve (the central bank of the United States or the Fed). Market volatility has spiked in reaction to the result and we expect this to continue over the coming weeks as speculation builds about his likely policy agenda.
However, at Standard Life Investments, we stress how important it is to not overreact to this noise and instead to wait for clear announcements of priorities.
Prioritising tax cuts and relaxing regulation
Both the President elect and Republicans in the House of Representatives placed large tax cuts and corporate tax reform at the heart of their financial agenda. Mr Trump has also advocated a large increase in infrastructure spending.
With Republicans also controlling the Senate, this implies that a meaningful change to the financial policy is likely from late 2017 and into 2018. There’s a strong possibility that regulations will be relaxed across several sectors, including finance, energy, telecommunications and healthcare.
Trade policy will be pivotal for the economy
Taken at face value, these policies would boost economic activity over the next two years.
However, Mr Trump has pledged to increase trade protection and cut back on immigration – policies that would simultaneously weaken growth and lift inflationary pressures. We suspect the new administration won’t ramp up tariffs on Mexican and Chinese imports but rather bury the prospect of new trade agreements and will make more use of the enforcement clauses in existing agreements.
And the Fed…
If this happens, there’s a greater chance the Fed will delay lifting interest rates into 2017 as it waits until there’s more clarity on market and policy outlooks. Once the noise has died down and it becomes clear the financial policy aims to help encourage economic growth, we think the Fed’s likely to begin lifting rates, and at a faster pace than previously.
On the other hand, if President Trump turns out to be serious about pursuing a much more protectionist policy agenda, the negative consequences for economic activity and corporate margins could easily offset the benefits of any financial easing which has previously been done to help boost the economy.
This would prevent the Fed from increasing interest rates for some time. And, if the outcomes of Trump’s protectionist policy agenda are especially disruptive, the Fed could even consider easing policy. The subsequent effect would determine when and how the Fed would begin to reduce inflationary pressures once the turmoil subsided.
The result has caused markets to move to perceived safer environments, with bonds rallying and riskier investment types, including equities, declining substantially. The US dollar has been broadly stable, though it has fallen against the major developed currencies and risen against emerging market currencies, especially the Mexican Peso.
This downbeat market mood could last several weeks. However, the implications for markets depend on the actual policies of President Trump and what can be negotiated through Congress.
At Standard Life Investments, we believe a number of forces will influence how the dollar moves over the longer term. We expect government bond yields to be supported in the short term but how that will play out over the coming months will depend on changes to policies.
Once the volatility in equity markets subsides, we think lower corporate taxes and looser regulatory policies could provide a lift to markets. However, any increase in the US dollar or higher interest rates would be negative.
Such an environment could create opportunities for investors focusing at a company level. Firms with extensive global exposure or those which are reliant on migrant labour would face a more uncertain future; firms that tend to face onerous regulatory requirements stand to benefit.
If the new administration begins to aggressively undo previous policies that have supported globalisation, it’s likely we’ll see an extended period of weakness, particularly for risk investments, like equities.
Clearly it’s too early to fully assess the implications of the election result on markets, politics and the economy. With the political landscape set to change in the US, it could impact many countries and regions of the world.
So, it’s more important than ever to have a well-diversified portfolio, as is taking a long-term view. However, we’ll be providing more updates from Standard Life Investments when there’s more clarity on the policies of the new Trump administration.