By Tim Chesterfield, Chief Investment Officer
After a brutal presidential race, Donald Trump’s victory speech was astounding. In contrast to the antagonistic attacks of the election process, Trump sounded almost presidential in nature with a balanced and conciliatory tone. He talked of bringing the nation together and working with allies. Investment markets rallied afterwards.
Now, we need to hear more about his policies and what he can actually implement. Given he is not a career politician it is probable that he will be willing to undertake unpalatable policy. However, four years is not a long time to effect major change.
- Neither the president nor any other politician has the power to really affect the growth of a nation let alone one as large as the United States. At best they can nudge it at the tiller so do not expect a recession any time soon.
- The president is not all powerful. Whilst the president’s office has executive power, is commander in chief, may make treaties (with two-thirds congressional approval) and may make public appointments (e.g. Supreme Court judges, ambassadors and senior public servants) the president still requires congressional approval for appropriation and revenue bills. However, the president does have powers governing trade which may have implications for North American Free Trade Agreement (NAFTA) and the World Trade Organisation (WTO).
- Whilst we could see volatility increase in the short term, wealth is created over the medium and long term.
- The true nature of the president-elect is unknown. The presidential election process is a circus and there are real circuit breakers in the congressional and policy process to protect. With a pledge to get things done and “make America great again” we may find out that his election is beneficial in the fullness of time.
It was an extraordinary 24 hours and reminiscent of the series of events leading up to the Brexit referendum. The polls had Hillary Clinton ahead and Donald Trump with only a very narrow path to win the presidency and the White House. Both candidates cast their vote and the nation turned out to make a difference.
As with the vote in the UK, the early results went as predicted but soon it became evident that the outcome was going to be far tighter than people had expected. Quickly it became apparent that the so-called ‘swing states’ were leaning toward Donald Trump. Then Florida and its 29 electoral votes fell to Trump.
Before long, financial markets were in turmoil and the media was scaremongering. In the US, the S&P 500 (a key benchmark) was indicating a rough day as equities fell toward the maximum 5% allowed before circuit breakers kicked it. The US 10Y Govt. Bond saw its yield fall to almost 1.70% and world currency markets saw a flight to safety in the Japanese Yen and US Dollar. However, when European bourses opened the expected losses were far lower than previously indicated and by the end of trading had finished up over 1%. After a shaky start, the US was up over 1% and the US 10Y Govt. Bond saw its yield rocket to almost 2.07%.
This type of volatility is not necessarily an investor’s friend and those that succumbed to the scaremongering will inevitably be licking wounds today.
But what does the president-elect, Donald Trump mean for investors over the near and long term?
It is important to remember that wealth creation comes over time from a properly and well-constructed investment portfolio – and not from reacting to every single event that comes along the bumpy road. That path can lead to poor decisions.
In the weeks, months and years ahead we shall still be analysing the ramifications of the events of November 8th which we believe represent a seismic shift in the US political landscape. For investors it will most certainly mean we will continue to see volatility in equities, bonds and currency markets but this is not unusual and has been the hallmark of 2016.
As we head toward Trump’s inauguration on January 20th 2017 more detail on appointments and policies will be revealed and these may spark periods of uncertainty. What we know to date is that his policies are centred on three pillars – trade, immigration and taxes.
Trade is one of the biggest points of investor and government focus and Trump appears to be protectionist in nature. Throughout his campaign he has repeatedly threatened to “rip up” the existing trade agreements and the future of the Trans-Pacific Partnership Agreement (TPPA) may be in doubt unless the current administration continues to push this forward.
Trump’s rhetoric on trade should not come as a shock to anyone. Trump believes that America has been left short in the negotiated agreements and naturally wishes to reappraise and renegotiate these.
I do not expect a ‘bull in a china shop approach.’ International trade is complex and whilst Trump will wish to move on his election promises, it will take time. It is more than possible that we will not see any meaningful change until well into his term as president. US businesses generate significant benefits from exporting their goods and services around the world and a wholesale trade war would not benefit US companies or their profitability and would almost certainly lead to job losses. This would be completely at odds with Trump’s desire to increase employment.
Trump wishes to revisit the tax environment and has pledged to lower both personal and corporate tax rates. For US businesses, Trump has pledged to cut the corporate tax rate from 35% to 15% which should underpin US corporate profitability and also encourage foreign multinationals to open their doors in the US. Whilst this appears to be positive the uncertainty in the international trade picture will cause businesses to operate in a cautious manner which could lead to a deferral or cut in the level of investment.
Although, Trump wishes to lower tax rates he wishes to do so whilst continuing to maintain Social Security, Medicare and increase infrastructure and defence spending. This will require funding and, with lower tax receipts, will cause the level of US debt to rise. Consequently, we should expect to see an increase in the issuance of US government bonds and this will pressure bond prices and raise yields.
Trump’s policies may present a shot in the arm for the rate of inflation – which continues to languish not only in the US but also globally. His pledge to remove millions of illegal or undocumented workers will serve to diminish the number of people available to work and lead to wage increases. The US economy generates approximately 70% of its gross domestic product (GDP) from consumer spending and this move would be a positive for consumer spending and growth.
Infrastructure is another hot topic for Trump. Recently, he talked about injecting $1 trillion into ailing US infrastructure. Whilst this is a positive, it will not be meaningful to growth in the short to medium term given the very long-term nature of infrastructure projects.
Unless Trump can effect lasting changes that are structural in nature, sitting on one’s hands may be the right thing to do to generate long-term wealth.
Here are my observations, for now at least:
The status quo appears to being challenged globally. Donald Trump’s unexpected victory follows on less than five months after the United Kingdom voted to leave the European Union and that saw investment prices move strongly higher after a short period of volatility.
However, we should be prepared and remember that volatility and testing times will not stop here. There will be testing times ahead, with a general election in the Netherlands (Q1 2017), presidential election in France (Q2 2017) and a general election in Germany in September 2017.
This is a seismic shift in the political landscape and something we discussed in regard to Brexit. To express what has happened seems to be a bit of a fictional piece of writing. Trump, whose comments appeared to alienate segments of the population through statements that gathered the media’s attention, whose election spending was dwarfed by Hillary Clinton’s and who has no apparent political credentials to run a government, is unprecedented. Hollywood will be scrambling for the inside story.