Our Opinion: 2016

It’s Trump!

Donald Trump has been elected the 45th President of the United States.  Much like Brexit, this was widely unanticipated by political commentators, pollsters and investors alike, and the initial market reaction to the result was sharply negative.

However, Mr. Trump’s acceptance speech was conciliatory in tone and gave an indication that he aims to be inclusive. The market appeared to take the content and tone of the speech well, sending prices up. US, UK and European markets actually ended today higher, and Asian equities are surging this evening.

Perhaps as significant as the Trump presidency is the fact that the Republicans have taken control of both the Upper and Lower Houses in Congress.  This will be appreciated by the US stock market (at least in the short term) because the Republican Party is fundamentally pro-business.

The future provides considerable uncertainties, not least Trump’s policy on trade and tariffs, where Trump’s rhetoric looked very protectionist.  A brake on world trade would not be good for long-term wealth creation and is probably the biggest global economic threat of this presidency.  That said, experienced Republican politicians will be well aware of the pitfalls of populism, and it will be interesting to see whom Mr. Trump appoints as his advisers. A key question for the next few weeks will be the direction of monetary policy. The likelihood of an interest rate rise in the US next month fell this morning from about 80% to 50%.  The very public criticism by Mr. Trump of Janet Yellen (who heads the US Federal Reserve) increases risks surrounding this.

Also, how will Trump pay for his intended boost to infrastructure? What will foreign policy look like?  All of this will have implications for the US dollar, likely to become something of a meter through which the market will evaluate a fledgling Trump presidency.

With all this in mind, some volatility is likely in the short term. However, given the Trumpian rhetoric around infrastructure, protectionism, defence and corporate cash repatriation, there will undoubtedly be opportunities for investors.

Given that 80% of Mexican exports are US bound, and 98% of remittances come from Mexican workers in the US, that nation’s assets were among the few that failed to retrace their steps meaningfully through the day. Given Trump’s proposed curbs on immigration and trade, those declines seem justified, and Mexican opportunities are likely to be very limited for some time.

US financials and health care, meanwhile, will look attractive, with the Republican Party in control of both the White House and Congress. These sectors stand to benefit from lower regulatory risks. Financials could also get a boost if interest rates continue to move higher as the markets focus on the reflationary aspects of Trump’s likely policies.

Mr. Trump has pledged to modernise the US’ infrastructure throughout his campaign and reiterated his commitment to increasing infrastructure spending in his acceptance speech. This comes at a time when the American Society of Civil Engineers estimates around 20% of US roads are in poor or mediocre condition, and around 67,000 US bridges are structurally deficient. This suggests potential benefits for investments exposed to higher investment spending.

This election campaign had two of the most unpopular candidates, competing in one of the most divisive contests ever. Record numbers of key demographic groups turned up to vote. And we have perhaps the most unorthodox winner of a US presidential race in history. Exciting times ahead….

10th November 2016