House View by the Chief Investment Office

What will a Trump presidency mean for markets? ... And why we should care.

22 November 2016 | Tags: US Equities

Reading time: 4 minutes

Donald Trump’s surprise victory in the US presidential race marks a dramatic shift in the status quo for the world’s largest economy.

The election of Donald Trump added to a year of political surprises around the world, and his policy agenda is a key focus for global markets.

With a Republican majority in both houses of Congress, Trump will have latitude to implement executive decisions that could significantly alter the status quo of US economic and social policy, with global implications.

This period of change could be long lasting. Senate Democrats will need to defend twice as many seats as Republicans in the next election, suggesting that the Republicans have a high probability of preserving their majority for the next four years.

We believe that investors are well-advised to consider three broad policy areas: Expansionary fiscal policy, pro-business policies, international trade.

The promise of an expansionary fiscal policy. Trump ran on a platform of tax cuts and higher public spending. He pledged to invest USD 1trn in American infrastructure over the coming decade, and reiterated his commitment in his first speech as President-elect. The fiscal stimulus provided by lower taxation and higher federal spending will have broad macroeconomic and investment implications. Military contractors and construction firms stand to benefit, for example. We also expect to see incremental pressure on wage inflation, increasing the appeal of Treasury Inflation Protected Securities (TIPS) versus other US government bonds.

The pledges to enact pro-business policies, lower corporate taxes, and reduce regulation. The president-elect has promised to boost economic growth by scrapping intrusive federal regulations, lowering corporate tax rates, and by reducing the cost of regulatory compliance.

We believe the US energy sector stands to benefit from operating in a more lenient regulatory environment. The elimination of a risk premium assessed on financial services and pharmaceutical stocks should also free these sectors for better performance next year. Headline risk over drug prices will persist, but government intervention is far less likely under the next administration. And companies more broadly could see their tax bills reduced. Pro-business legislation, lower corporate taxes, and reduced regulation can support US equities, where we already expect 8% earnings growth next year.

"What separates the winners from the losers is how a person reacts to each new twist of fate."
- Donald Trump

The threat to trade and immigration.

Trump vowed to adopt a tougher negotiating stance with US trading partners. If this translates into policy, it could prove to be a serious economic challenge for Mexico, which relies on the US for 80% of its exports and 98% of the remittances it receives from Mexican workers abroad. We believe that a Trump presidency will create some volatility. However, while the shift may pose challenges for some trade-focused emerging nations – such as Mexico, South Korea and Colombia – countries with larger domestic economies like Brazil and India should be less vulnerable. Added to this, US relations with Russia may improve, given indications of mutual respect between Vladimir Putin and Trump. Barring radical policy development, we believe the economic and earnings revival now underway in most emerging markets (EM) can continue. We head toward 2017 overweight EM equities and select EM currencies.

After the initial uncertainty over his unorthodox trade and immigration policies abated, equity markets improved on optimism that fiscal stimulus and reduced regulation will promote economic growth. CIO believes that TIPS, US equities, and EM equities can continue to advance through next year.

In short

More expansionary fiscal policy and pro-business legislation under Donald Trump’s leadership should prove supportive of Treasury Inflation Protected Securities (TIPS) and some sectors of the US equity market. Uncertainty is higher for emerging markets, but we expect growth to provide support through 2017.

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