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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 websites nor the services, products or items offered through such websites. 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