US election: What the fund managers are saying, November 2016
In the second big, unexpected political outcome of 2016, Donald Trump was voted in as the 45th president of the United States of America yesterday. Markets saw an initial sell-off globally; however, as the day wore on reactions moderated somewhat and at the time of writing (just after lunch on Wednesday) the UK stock market is broadly steady.
Responses to the result vary from uncertainty over emerging markets and extremely cautious views on US (and global) growth prospects in line with Trump's protectionist rhetoric to more upbeat economic forecasts based on the cutting of corporate taxes and a predicted surge in infrastructure and defence spending. We take a look at what some of our most held fund groups are saying.
Rathbones; James Thomson, fund manager
“Investors and the media usually overestimate political impacts on financial markets. Since 1932, the average return of the S&P 500 one month after a US election is -1.0%. After the shock of president Trump dissipates, markets will calm and could potentially cheer the business-friendly rhetoric and policies of both the candidate and the Republican party.
“If economic and stock market uncertainty increases, it just pushes off rate hikes. In fact, the chance of a rate hike in December (implied by US dollar swaps) has now dropped to just 25%. Trump wants to lower personal and business income tax drastically. Tax cuts get spent, so this should be good for consumption. Also, he will likely reduce the tax take on stranded cash held overseas, a boon for many US companies which will be able repatriate hundreds of billions of dollars back to shareholders.”
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Investec Asset Management; House view
“It is going to take time for the new administration’s agenda to become clear, let alone be implemented. Trump is the first US president to be elected who has never held formal political office nor a position in the military, so there are a lot of unknowns in how he will take decisions, and how he will fill his transition team.
“In the medium term, Trump’s protectionist agenda may weigh on global growth if pursued, with looser fiscal policy providing some offset. In combination, these measures could also lead to higher inflation. For now, we believe that the global economy will continue on its current path of a synchronised pick-up in growth, which should help market sentiment. However, this election result reinforces the sense that populism is on the rise globally and concerns are now likely to focus on how this phenomenon will impact other forthcoming elections.
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Fidelity International; Dominic Rossi, global CIO equities
“The probability of a hike in interest rates in December, followed by two further hikes in 2017, has fallen sharply. The dollar, which has been trending higher in anticipation, has consequently reversed. Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative.
“Republican control of both Houses offers an opportunity to break the political gridlock of recent years in domestic areas of policy … but none of this will convince investors in the short term.”
Fidelity International; Nick Peters, multi-asset portfolio manager
“For emerging markets (EM) there are significant risks. The US presidency has substantial clout regarding EM-sensitive policies, such as trade tariffs and barriers, renegotiating the North American Free Trade Agreement or designating currency manipulators (with potential implications for China or Korea). While economic expediency could serve to limit the negative impacts, sentiment is likely take a ‘knee-jerk’ hit – especially in Mexico.”
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M&G Investments; Jim Leaviss, head of retail fixed interest
“As expectations of a Trump win grew last night, the US treasury bond market rallied aggressively. You might think this perverse given that Trump has openly discussed “haircutting” treasury investors, but this is a flight to quality response. The US Federal Reserve was seen as nailed on for a 25 bps hike in December, but the uncertainty impact of a Trump win makes this much less likely (and will Janet Yellen still be head of the Fed under a Trump regime?).
“The big implication for investors of what happened last night is this: with no income growth for most populations in developed world economies since the great financial crisis, the established parties and candidates are being heavily punished in elections. It doesn’t stop here – we have a referendum on the Italian constitution next month, and many more European elections in 2017 (could Marine Le Pen be elected President in France?). Having seen the electoral shifts in the UK with Brexit and now the US, do established political parties react by promising significant fiscal expansions? Could last night’s vote trigger the end of global austerity?”
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Old Mutual; Mark Nash, head of global bonds
“Crucially for investors, the outlook for the US Federal Reserve (Fed) has become clouded. The central bank may well refrain from raising interest rates in December, as heightened uncertainty over the direction of macroeconomic policy under Trump is likely to curb spending by households, as well as hampering business and trade.
“The Fed could actually tighten policy if the central bank believes the fiscal easing pursued by the Trump administration will have more than a transitory impact on inflation. Adding to the uncertainty, however, is the possibility that Janet Yellen may not remain as in her post as Fed chair, due to the suspected animosity between her and the president elect.
“The medium-term picture remains somewhat murky, as Trump might not make good on many of his campaign pledges in the face of opposition from his advisers or Congress. Until we gain more clarity on what the 45th president is able and willing to do, investors will need to brace for what is likely to be quite a ride for markets and the global economy.”
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Standard Life Investments; House view
“The president-elect and house Republicans have placed large tax cuts and corporate tax reform at the heart of their fiscal agenda. Trump has also advocated a large increase in infrastructure spending. With Republicans also controlling the senate, this implies a likely loosening of fiscal policy from late 2017 and into 2018, though fiscal conservatives in Congress may seek some offsetting cuts to other areas of discretionary spending. There is a strong prospect that the regulatory noose will loosen across finance, energy, telecoms and healthcare sectors.
“At face value, the above policy agenda would boost economic activity over the next two years. However, Trump has pledged to increase trade protection and reduce immigration – policies that would simultaneously weaken economic growth and increase inflationary pressures.
“In equities, once volatility subsides, lower corporate taxes and looser regulatory policies could provide a lift to markets. However, any increase in the US dollar or higher interest rates would be negative. If the new Trump administration pursues an aggressive unwinding of polices that have supported globalisation, an extended period of weakness for risk assets is likely. This environment is likely to create opportunities for ‘bottom-up’ stock-picking in both equity and bond markets.”
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