Capital Markets Briefing: US election special

Top Trump 

So Donald Trump is going to be the 45th president of the US, with a Republican majority in both the Senate and House of Representatives. In light of ‘Brexit’, no one should be wholly surprised by the result of the US presidential election. But with the vote for change so popular, the incumbent leaders and the broader political establishment in both Germany and France must now be looking at their own impending elections in 2017 with a certain amount of trepidation. 

On paper, it looks like Trump has a strong mandate to push through his agenda. But he is a divisive figure within his own party, with many Republicans likely to feel more abhorrence towards his policies than to those of defeated Democrat candidate Hillary Clinton. Trump’s majority in the election is therefore likely to be misleading. 

A key issue is that while the presidential campaign was strong on rhetoric and mud-slinging, it was a little thin on policy. There isn’t much to go on in terms of what the Trump agenda actually is and how it might be implemented once he moves into the White House in January 2017.

UK market reaction

The rather benign initial market reaction in the UK (Asia was a little less forgiving) might be down to a number of things:

  • Although many people were shocked by the result, UK investors were perhaps not particularly surprised by it.
  • There wasn’t much for investors to react to in terms of what a Trump win actually means.
  • Investors are waiting on the sidelines for opportunities.
  • There is a strong belief that the US political system is likely to dilute, if not thwart, much of Trump’s more contentious views and policies.
  • An arrest warrant wasn’t issued for Hillary Clinton during Trump’s victory speech, which took on a much more conciliatory tone.

How will the US market react?

When the US market opened for business the day after the election we were able to see what this win actually meant. The market was certainly pricing in a Clinton win and has once again, like the pollsters, been proved wrong. On that basis, a correction was due in the S&P 500 – the index of leading US companies. We anticipated a similar reaction in the UK following Brexit, and saw a very quick bounce back. There is plenty of time to absorb the news and assess the impact, as Barack Obama begins the ‘lame duck’ phase of his presidency and as ‘leader of the free world’ until Trump’s inauguration in January 2017. 

In the short term, we’d expect a negative investor reaction and for the S&P 500 to experience an indiscriminate correction as investors take a more cautious approach. But we also suspect that there are many investors, like ourselves, who have held cash on the sidelines for just such an eventuality, ready to buy back shares in on more attractive valuations. This could temper the market reaction a little. 

What will happen to the US dollar? Sterling bore the brunt of Brexit but the US dollar is unlikely to do the same. So although logic might dictate that US government bonds would struggle on the basis of Trump’s comments on the US deficit, their status as a ‘safe haven’ for investors should keep yields low and prices high as risk-averse investors buy them. 

Gold attraction

Gold is likely to come into its own with a likely increase in demand. Events in India are also boosting demand after the Indian government decided to scrap its large-denomination notes in a bid to undermine the ‘black economy’ and reduce corruption. The timing of the announcement the day after the US election wasn’t great. Although we do not hold gold in our investment portfolios, we suspect it will perform well in the coming weeks. We also believe the dollar will retain its status as the world’s safe haven currency. 

Fed reaction crucial

How the US Federal Reserve (Fed) reacts to Trump’s triumph will be critical. Expectations were that the Fed would take the opportunity at its December press conference to announce a path of rising rates. The Trump win changes the game somewhat and Fed chair Janet Yellen’s future may well be under question. It is highly possible that the Fed will continue to delay raising interest rates for now. 

Stock market winners and losers

From what we can glean from Trump’s campaign, there are a few obvious stock market winners and losers. We are likely to see a more discriminate recovery within the S&P 500 should the anticipated correction occur. Infrastructure is an obvious winner – but not as a consequence of Trump’s promise to build a wall between the US and Mexico. Increasing infrastructure spend was on both candidates’ election campaign tickets. Trump has pledged more defence spending, while his stance on climate change takes a few steps back and fossil fuel industries may find they are in a better place, from a regulatory perspective. Tax cuts may well help consumer goods. Trump’s protectionist stance, though, isn’t going to be particularly helpful for the prospects of the global economy.

Fund managers’ view

As with the UK’s referendum vote to leave the European Union, we came into the US election with a cautious view, believing the outcome to be too close to call. We have held back cash and will be watching the US market closely for the opportunity to buy back into the market at more attractive valuations, should the S&P 500, and other leading markets, overreact to the news. 

In the short-term, this strategy is likely to be implemented through passively managed exchange-traded funds (ETFs) that track market indices. But in the longer term, it may be time for active fund managers to come into their own – while we seek the ability not only to back the winners, but also to avoid the losers as the world adjusts to a new phase in US politics. 

This isn’t the time to panic. We’ve seen a lot of sometimes appalling headlines from Donald Trump’s presidential campaign in recent months. But we would expect the reality of US government to prevent much of what he has said from actually happening.