Now that the dust has settled, Donald Trump has emerged victorious in the 2016 US Presidential election and is scheduled to be sworn in as President on 20 January 2017. Meanwhile, the Republican Party also secured a clean sweep of Congress, gaining majorities in both the House of Representatives and Senate. This will potentially remove some political gridlock that has characterised US politics in recent years, allowing Mr. Trump greater freedom to implement his policies.
Although polls tightened ahead of the event, Secretary Clinton was a heavy pre-election betting favourite and it is therefore unsurprising that there has been a relatively large market reaction (although we note that this has been more muted than that following the UK’s vote to leave the European Union). The US dollar has sold off and global equity markets are down, with Asian stock exchanges selling off heavily overnight and Western equity market futures indicating losses (S&P Index futures fell by their daily limit of 5% before making a recovery ahead of the European open). Risk aversion has also been evident in the fixed income markets, with shorter-dated sovereign bond yields falling globally. We note that the treasury yield curve has steepened, with the yields of longer-duration issues rising as the market has priced in higher growth and inflation expectations. Gold has also benefitted from both risk aversion and rising inflation expectations.
Indeed, given his pre-election campaign pledges we expect the new President to implement a number of policies that will be supportive of US growth and inflation. These are likely to include a rise in the minimum wage and an increase in US fiscal spending (particularly in regards to infrastructure investment). Likewise, he has also pledged to make significant corporate tax cuts, which will provide a tailwind to US-exposed businesses. Further, it is possible that he will attempt to influence Federal Reserve policy; given some of his prior comments, we would expect him to favour a less-independent, more-hawkish central bank.
Since before the UK’s referendum on its European Union membership, we had identified political risk as a major headwind for global asset markets and Mr. Trump’s victory reinforces the move towards populist and protectionist policies that the UK referendum result brought to the fore, in our view. Given the new President’s pre-election stances on government borrowing (higher), trade protectionism (increase) and immigration (decrease), we believe that geopolitical uncertainty has now risen further. This is likely to have an adverse impact on investor sentiment, which could be exacerbated by perceptions that his personality is somewhat volatile.
Given that we had identified political risk as having risen, we reduced our equity exposure as a house in the summer and have since been holding elevated cash positions. Although the US election has now passed and markets have fallen, events in Europe and elsewhere still present significant risks for investors over the coming quarters, with Italy’s constitutional referendum on Sunday 4 December providing the first hurdle and the Dutch, French and German elections to follow over the course of the next year. Nevertheless, events such as these can create opportunities to purchase quality assets at attractive prices.
Over the medium term, we expect global bond yields to remain on an upward trajectory, albeit potentially amid some volatility, as the Federal Reserve already appears keen to raise US interest rates (although it is possible that the election result could impact their resolve). Likewise, we also expect the US dollar to continue to strengthen, despite its overnight weakness. Obviously, these trends hold significant implications for global asset markets and we will continue to monitor political and economic developments, adjusting our asset allocation as appropriate.
As always, should you have any queries please do not hesitate to contact your Credence International representative.