- Equities bear the brunt of knee-jerk market reaction but investors should heed the experience of the ‘Brexit’ vote and not take rash actions
- Emerging markets are more exposed to Trump-induced downside than US shares
- Trump's fiscal expansionism may lead to higher bond yields over time – though in the short term, bond prices will rally from the flight to perceived safe havens, along with gold
- Prospect for a post-Brexit UK-US trade deal radically improved
The anti-establishment candidate
The most acrimonious US presidential campaign in history reached a dramatic finale last night with a victory for maverick real-estate mogul and reality TV personality Donald Trump. Trump had already promised a Brexit-like shock and the Republican candidate scooped up key swing states, defying the final opinion polls and predictions that a large turnout by Hispanic voters would deliver the presidency for Hillary Clinton.
Trump will make history in being the first president to have never held public office or served in the armed forces. As is often stated, markets hate uncertainty, and therefore a Trump win is the outcome the markets have most feared, given his diplomatic inexperience and controversial views. Trump advocates protectionist policies that include high tariffs on Chinese and Mexican goods and tearing up trade agreements. Such a victory signals a clear vote for change in US politics and economic management, and part of a wider phenomenon where rising social inequality in the wake of the global financial crisis – fuelled by Central bank policies, we believe – is spurring anti-establishment politics.
The political earthquake unleashed by the US electorate is already provoking extreme volatility in global markets, with equity index futures and Asian markets down sharply overnight and the Mexican peso collapsing to an eight-year low. Mexico is especially vulnerable to Trump's proposed crackdown on illegal immigration and vow to repatriate manufacturing jobs back to the US.
Equities across the globe look set to bear the brunt of the negative market reaction in the short term, while there is a corresponding near-term flight to perceived safe havens such as gold, the yen and the Swiss franc and developed-market sovereign bonds. However, unlike the EU referendum, the risks of a surprise had started to weigh on equities during the final fortnight of the campaign as polls narrowed – which may explain why, so far, moves have not been as deep as some may have anticipated.
With a period of heightened turbulence as the markets digest this result, we would urge that long-term investors refrain from making rash decisions. As we saw during the days following the UK’s vote to leave the EU in June, markets have a habit of overreacting to shock political events and a sell-off could ease some of the concerns that have been mounting around stretched valuations. If you are a long-term investor rather than a short-term trader, sometimes the best course of action is simply to sit tight.
A wide range of outcomes
As people consider the longer-term implications of what all this means, the range of outcomes is wide given the lack of policy detail or knowledge of who will serve in a Trump administration. Based on Trump's broad stance of slapping tariffs on Chinese and Mexican imports, bringing jobs back to the US and expansionary fiscal policies which might result in higher borrowing costs, the impact could well be more negative for emerging markets than the US itself, where the domestic economy might be boosted by tax cuts and infrastructure investment. That could prove positive for shares in US domestic companies but might also see bond yields rise if the deficit widens. That might suggest that any immediate bounce in US Treasuries from panicky investors could provide an opportunity to lock-in profits.
Though markets were clearly favouring a Clinton win as the candidate representing a relative policy status quo, in truth neither candidate represented a business-friendly panacea. Indeed Clinton herself has been mildly critical of free trade and aspects of her agenda had caused anxiety for certain business sectors. In particular, the healthcare sector has been impacted by concerns that a Democratic administration would implement increased drug pricing control. Clinton has also been a passionate advocate of the reduced use of fossil fuels, which is in stark contrast to Trump’s views on climate change. As the dust settles on the immediate market reaction to the election, we may well see some anxiety dissipate in stocks in sectors where the market was negatively factoring in a Clinton win.
What are the implications for the UK?
The medium-term read through for the UK could be interesting. A slide in the dollar might help reduce some of the inflationary pressures in the short term, as many imports are priced in the dollar. But the currency shift could also reduce some of the expected exchange rate benefits to UK company earnings delivered from revenues made in dollars. Significantly, Trump has previously praised the UK's decision to leave the EU and said he would prioritise a trade deal with the UK, a markedly different view to that of President Obama who said the UK would be at the ‘back of the queue’ for such an agreement.
As we get through the coming days, markets will increasingly dwell on the next move by the US Federal Reserve (the Fed). The markets had been anticipating the first interest-rate hike in a year next month from the Fed. The uncertainty created by Trump’s win may see the Fed back away from such a move as it did following the Brexit vote, a decision that might provide some short-term relief to stock markets.
Good companies will still be good companies
Whatever the extent of any knee-jerk reaction, good companies with robust business models will still be good companies next week. Their fortunes will ultimately be driven by the quality of their businesses and the products and services they offer – not by who sits in the White House. Granted, Trump is a candidate like no other. But US presidents do not sit in the White House pulling economic levers to micro-manage the economy, and the US system of governance provides strong checks and balances of executive power through Congress, the Supreme Courts and a powerful independent Central bank in the Fed. The power that the president does have is that of patronage, and having been openly critical of Fed Chair Janet Yellen, there will inevitably be some speculation as to her future with her current tenure ending in early 2018.
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