Early Review of Financial Impact of the US Elections
Donald Trump has won the US Presidential Election, beating Hilary Clinton, and already we are seeing some initial reactions in the financial world with slight falls in markets around the globe but not the turmoil many investors had predicted.
The markets were caught off guard on Wednesday morning as key states voted in favour of the republican candidate; global financial markets have fallen in value with the US dollar and US equity futures dropping.
2016 has seen its fair share of political surprises, however this one may be the biggest to date – having emerged as (the somewhat unexpected) winner, Donald Trump will take office as President in January 2017 with US Congress (both the Senate and the House of Representatives) fully under republican control.
The result has already called into question the ability of forecasters to accurately predict outcomes and capture the extent of public discord and frustration with Western democracies. The outcome can be seen as a vote against the political establishment from a large section of society that is angry that policy has done little to aid economic recovery following the global financial crisis. It is likely that there will be policy changes now and, although it is difficult to have immediate clarity on what these will be, we should expect a more inclusive domestic growth agenda will emerge.
From a financial market perspective, the aftermath of the EU referendum in June gives us indication of expectations to an extent – equity markets sold off in the following few days but quickly regained composure to deliver some of the best performance of the year. Given the relatively muted response from markets thus far, it seems that investors may have learnt that there is no need to panic.
What we may see is an impact on the emerging market equities and debt as globalisation comes into the spotlight under a Trump administration. We should probably expect a greater focus on domestic political priorities at the expense of free trade and globalisation.
Trump has caused concern among many for his campaign comments over the last 18 months, but as it always the case the constraints of office will limit and moderate what he is able to do as president and many things mentioned on the campaign trail will not be deliverable. The direction of travel on globalisation and trade does appear to have changed but there will be checks and balances on the speed and extent of the more protectionist agenda that may emerge.
In terms of monetary policy, the result makes a December interest rate rise less likely. Overall, fund houses have commented that they expect the momentum in the US economy to continue with modest growth in 2017, relatively muted inflation and, with the prospect of a more stimulative fiscal policy and the absence of rate hikes, a Trump presidency does not necessarily foreshadow a US recession.
The outcome of the election does not dictate how the markets act in the long term – there have been numerous studies which have shown that the presidential outcomes have limited impact on the performance of the US market and it should not be any different this time.
Global volatility has increased as Asian markets closed with the Japanese Nikkei 225 falling over 5%. The biggest casualty so far has been the Mexican Peso, falling by over 8%. However, Gold prices have increased in value, rising above $1,300/oz.
In terms of current investments, we can remain fairly confident in the positioning of portfolios and their ability to continue to deliver attractive returns over the long-term.
With the new president-elect and change in administration, we could see an adjustment to the current momentum of markets before the official handover in 2017. Trump’s unorthodox views will not go down well with markets, at least in the short term, and we are likely to see a “sell America” trade in the immediate aftermath of the election. US Treasuries may initially rally, and then steepen as expectations for further strengthening of the USD versus other major currencies come off. A renewed focus on fiscal stimulus could lead to more directives supporting overall infrastructure, which is broadly positive for US growth in the longer term. However, in the near-term, softer inflation and potentially greater fiscal spend in the US could cause the dollar to underperform versus the EUR.
Beyond the initial reaction however, the election result it is not all bad news for US assets. Republican presidents have been strong proponents of lower taxes for both business and households, which, if implemented, should ultimately benefit the US corporate sector.
In conclusion, for better or worse, it is clear that Donald Trump will bring some new ideas to the White House. As ever, there will be winners and losers, and while the overall reaction to the election is muted, stocks in sectors including pharmaceutical and defence rose on the news this morning. Trump has openly stated that he recognises the need to rebuild and upgrade America’s infrastructure and there is also broad support for some measure of corporate tax reform to lower rates and reduce the number of loopholes.
The outcome of the election does not dictate how the markets act in the long term – there have been numerous studies which have shown that the presidential outcomes have limited impact on the performance of the US market and it should not be any different this time. It is important to remember that the US president’s powers are held in check as there is a separation of executive, legislative and judicial powers and before implementation.
Thinking more broadly, the US presidential result should remind investors that there is plenty of scope for political surprises. There are several significant elections looming in Europe over the next 18 months, which could be profoundly important for the future of the Eurozone project. It would be wrong to assume that America has a monopoly on disgruntled voters but as your financial adviser, I will keep a very close eye on political developments.