Download Investment Insight - Trump trade to Trump fade

Investment Insight
Trump trade to Trump fade?
18th May 2017
Current controversy surrounding the Trump administration is taking its toll on markets, as
investors fear that the administration’s ability to press on with its fiscal reform agenda will be
compromised. While a political scandal may slow progress, the likelihood of President Trump
being impeached appears low at the moment. Only two Presidents have ever been impeached
by the House – Andrew Johnson and Bill Clinton. Both were later acquitted during their Senate
trials. The only other President to have articles of impeachment brought before the full house
was Richard Nixon, who resigned before impeachment could be voted on. The impeachment
process itself, moreover, requires approval by both chambers of Congress and a relatively high
burden of evidence. Given that we have already moderated our expectations for US fiscal
stimulus and valuations at the index level have been looking rich, we have already been
trimming our overweight to the US in favour of markets with more upside, such as Europe and
Emerging Markets.
Introduction
What is the issue?
A little over 100 days into Donald Trump’s presidency,
controversy surrounding the President has begun to
impact financial markets. While the Trump administration
has been dogged from the very beginning by rumours of
impropriety, the firing of FBI Director James Comey and
subsequent events seem to have undermined
confidence that the government can deliver its economic
programme.
After Comey was dismissed, reports surfaced that the
President had asked Comey to abandon an investigation
into Michael Flynn, who had earlier this year resigned as
Trump’s National Security Advisor, over his links to
Russia. There are questions about whether Trump knew
that Flynn himself was being investigated prior to his
appointment. Moreover, the US needs a clear answer
into whether Trump or his campaign staff was involved
in tampering with the US election process with Russia.
While the US Dollar has been drifting gradually lower
from the December high, the decline since Comey’s
dismissal has been more pronounced, with the USD
falling -2%, and now only 1% above its pre-election
level. Stocks have fallen 2%, but remain 12% above
their pre-election level and are still up nearly 6% year to
date in local currency terms.
The controversy surrounding Trump is likely to continue
but it is not clear that this undermines the economic and
earnings trajectory of the US and global markets, which
have been relatively supportive. Delays in implementing
fiscal initiatives moreover are more likely to cause the US
Federal Reserve to be less aggressive in rate hikes over
the next year.
To lead the review, the Department of Justice has
appointed a Special Counsel led by Robert Mueller. FBI
Director under both Presidents Bush and Obama,
Mueller is seen as apolitical and independent, and a man
of impeccable credentials. The investigation could take
months if not longer to determine whether there has
been an obstruction of justice. If Mueller finds evidence
that this is the case, the Constitution makes clear the
process that need to be followed.
How does impeachment happen?
The American Constitution allows Congress to cut short
a presidential term if it is agreed that they have
committed “treason, bribery, or other high crimes and
misdemeanours.” Obstruction of justice could be
construed as a misdemeanour.
If the impeachment process begins, the requirement for
a guilty verdict is relatively onerous. First, the
impeachment article must gain a majority in the House
of Representatives. Next, the president goes on trial
before the Senate working with the Supreme Court,
where a two-thirds majority is required after trial
proceedings for a guilty verdict. The Republicans have a
majority in both the House and the Senate, which could
help Trump.
At this stage, the process has not started and it is too
early to guess what the findings of the investigation will
be. Republicans will be loath to accelerate findings given
midterm elections in 2018. Once an impeachment
process begins, a president may be acquitted and
continue in office. If not, the president leaves office and
is replaced with the vice president.
What does this mean for investors?
Investors are clearly concerned that the controversy will
derail the administration’s ability to press on with its
fiscal reform agenda. Speaker of the House Paul Ryan
quipped yesterday that Republicans should ‘be able to
walk and chew gum at the same time’-a colloquial
reference to their ability to pursue and engage in this
investigation while still working on things like tax reform,
which is largely supported by Republicans.
Endgames
What happens if the President is indeed impeached or,
in an unlikely scenario, ousted by his own administration
via the 25th Amendment, a policy really intended for
instances of incapacitation? In this outcome, Vice
President Mike Pence would then be appointed a
candidate with the backing of the Republican Party if not
the same personality cult. Pence’s policies are likely to
be similar to those espoused by Trump, and arguably he
is more market friendly. Conversely, it is possible that
the allegations are dropped completely.
Investment strategy
We maintain a slight overweight allocation to the US,
which has delivered strong performance. With valuations
at the index level looking rich and a better global growth
environment supporting other regions, we have been
reducing this overweight over recent months and putting
the cash to work in Europe and Emerging Markets.
Volatility has been surprisingly low of late, a signal of
investor complacency. Given that political risk remains
elevated and markets have done well this year, we had
already anticipated some pull back or consolidation and
a likely pick up in volatility. In preparation, we have
trimmed our allocation to risk assets and increased our
cash allocation.
While the current controversy is certainly unhelpful to the
administration, investors began to temper their
expectations of reform some time ago as soon as delays
in passage of ACHA and health care reform were
apparent. Sectors expected to benefit from Trump’s
policies, such as Financials, have sold off hardest.
Slower progress on US fiscal stimulus may cause US
stocks to give back some of their gains, but the
economy appears to be growing steadily without a
further fiscal fillip, and the external investment
environment is supportive for now. Steady gains to
growth and inflation are supportive of equities, while
allowing the Federal Reserve to normalise monetary
policy at potentially a more orderly pace.
Important Information
The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute
our judgment as at the date shown and are subject to change without notice. This document is not intended as an
offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third
party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such
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