The majority of the world was not expecting to wake up to the news that Donald Trump has been elected the 45th President of the United States but many markets have yet to reflect this shock. Uncertainty is rife once more, but on a much more global scale than we have seen recently and the implications will be wide-ranging from stock, bond and currency markets to interest rates and global growth prospects.
Although there was a dip in UK stock market performance since the announcement, they recovered quite swiftly. Other assets have changed more aggressively: the Japanese stock market was one of the first to move, closing over 5% lower. The Yen moved up significantly against the US dollar, which fell against most other currencies, with the notable exception of the Mexican Peso.
Trump’s plans to introduce significant trade tariffs on Mexico and China could seriously impact global trade if implemented but could also sour some international relationships. We might expect a broader regression in international diplomacy if the protectionism that he has alluded to in the past (“America First”) is put into action.
Many questions will remain, but the most pressing concern for investors may be the future of US interest rates, as Trump’s disdain for Janet Yellen, the Chair of the Federal Reserve, is well-known. The anticipated interest rate increase in December looks very unlikely to be enacted among the enormous uncertainty, but over the medium-term rates may move more swiftly upwards in a more reflationary US, especially if Trump replaces Yellen with a more monetarily aggressive chief. It is important to bear in mind that, while the Senate and House of Representatives have remained Republican-controlled, not all of Trump’s more radical policies are likely to be rubber-stamped as there are still significant portions of the party that do not align with many of them.
In the short-term it will be no surprise for you to hear that we expect increased volatility (though the immediate reaction has been relatively muted) as many investors will perceive the outlook for certain risk assets to be diminished as policy becomes clearer. This reinforces our view that markets will provide plenty of risk, but more moderate returns over the next few years.
We are confident that opportunities will emerge and in the short time since Trump’s victory the winners have been: construction stocks (which have rallied already this year on further infrastructure anticipation), miners and raw materials; gold (up $50 this morning) which is historically a safe-haven asset; and bonds, which are both beneficiaries of a hostile environment and one in which interest rates are likely to stay lower for even longer than expected.
In his inaugural speech as President-elect Trump re-iterated that infrastructure spending would be a priority, potentially benefitting roads, rail, sea, air and internet infrastructure and networks and those who invest in them. The ‘multiplier’ knock-on effects to employment, productivity and potential economic growth are expected to lead to estimated increases worth $1.6 for every $1 spent and adding 13,000 jobs for every billion dollars spent (according to estimates prior to the election). We also expect financials to benefit from potentially looser regulation and higher interest rates, and defence stocks to perform well, as this will be one of the President’s priorities.
As we have alluded to, we have numerous questions and few answers at the moment and the extent to which President Trump will enact his high-profile plans remains to be seen. As such we are content to hold onto defensive assets and await clarity, but we must also be mindful of the potential opportunities this new era may bring.