Many claim that former Hollywood movie actor Ronald Reagan was one of the best Presidents the US ever had. What might they say in years to come of reality TV celebrity Donald Trump’s presidency? From where we stand today it is hard even to guess.
In arguably the most bitter and unpleasantly-fought US elections ever, very little was actually said about policy and what a President Trump might do. Perhaps that explains why initial market reaction was so muted. Equity markets in Europe fell a little, the sterling-dollar rate was unchanged, and US Treasuries weakened on the back of reduced growth and inflation expectations.
FTSE 100 pharma and mining stocks actually rose on the news – presumably on the assumption that Clinton would have sought to drive down drug costs aggressively and the belief that Trump’s limited talk of infrastructure investment (whether that’s building schools, airports or walls) suggests he will be good for commodities.
What do we actually know? We know Trump will become President next January. We know the Republican party retains control of the Senate and the House of Representatives, giving it the kind of strong legislative mandate that Obama never enjoyed. The rest is arguably informed conjecture.
Trump’s actual policy agenda and senior appointments will take time to materialise. Indications from the campaign suggest he will seek a more protectionist trade stance. He may cut corporate taxes, and he may introduce a programme of government spending on infrastructure.
Trump’s victory speech was more conciliatory in tone than his pre-election rhetoric. He reiterated his focus on infrastructure spending and also suggested a pro-business agenda.
The Republican party as a whole is instinctively pro-business but not typically in favour of big government expenditure or measures that increase the budget deficit, so there may still be conflict between the President and the legislature.
Trump and Fed chair Janet Yellen do not have a strong relationship, so there is some doubt as to her tenure and the implications for monetary policy.
Where does that leave us as investment managers seeking to protect and grow client assets?
At last week’s monthly asset allocation meeting we reduced US Treasury positions due to evidence of rising inflation expectations and concerns that the US dollar may weaken in the event of a Trump victory. We have now decided to reduce US Treasuries further. The Trump agenda, as far as we know it, would take inflation expectations higher, and US Treasuries’ safe-haven status is compromised by uncertainties surrounding his presidency.
Ultimately, a more business-friendly environment in the US, with higher growth, lower taxes and a little more inflation, may be a positive for equity markets – at least until the full effects of trade protectionism become apparent. This may take some time. As we have observed in the past, a little inflation is helpful for companies in generating sales growth and tends to be a characteristic of an environment in which equities outperform bonds.
We remain neutral in US equities but look for opportunities. We have been underweight UK equities for months and see little to change that view. More big questions are looming – with a series of elections planned in Europe in the coming year, where does that leave the EU? That is a question for another day, but it is clear that jurisdictions and regions want their sovereignty back and we are in for some interesting times.
Our first priority is always to protect client wealth, which is why we are overweight cash at the moment. It is not something we are particularly comfortable with, but for now it feels wise to watch, wait and quietly carry on researching attractive stocks. There may be opportunities to invest that cash wisely in the months ahead.
James Horniman, Portfolio Manager
Published 9 November 2016
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