Download Thoughts on Trump`s victory

Thoughts on Trump’s victory
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9 November 2016
After an initial panic sell-off, markets have largely recovered and are now trading relatively calmly in reaction to
the shock of Trump’s victory. Whilst a Clinton victory would have represented a continuation of the status quo,
Trump’s victory clearly signals a need for change in the way politics is conducted in the USA. The parallels with
the underlying message delivered by the Brexit vote are all too clear. The root cause of these protest votes also
seems quite apparent, as too few people see themselves as benefitting from any recovery since the Great
Financial Crash. Growing inequality and low wage growth mean that the system is now seen to be working only
for the few, rather than the many.
Our client portfolios had been cautiously positioned going into this, with much larger than normal cash positions.
Whilst we were poised to react should a market dislocation present us with an opportunity to buy back into risk at
an attractive price, no such opportunity has been forthcoming. Therefore, client portfolio asset allocation remains
unchanged.
In his victory speech, Trump sounded much more conciliatory, and it seems likely that some of the more
controversial elements of Trump’s campaign will fade away. Is it possible that having fought such an unedifying
campaign, we will now see a much more Presidential Trump? Certainly it is also comforting that the US political
system has significant checks and balances built within it to ward off any extreme policy initiatives.
Whilst Trump has been quite light on policy, there are a few things we can say based on comments made in
campaign speeches:
1. On trade: Trump has been very critical about the impact of globalisation on US blue collar jobs. Since
trade negotiations are an area where a President has substantial influence, the Trans-Pacific Partnership
looks unlikely to get off the drawing board. NAFTA in it current form also looks to be under threat. Trump
has said that he wants a renegotiation, and if the Mexican’s won’t play ball, talked of withdrawing
unilaterally from NAFTA. Since 80 per cent of Mexico’s exports go to the US, this has had a significant
impact on the Mexico’s peso and financial markets.
2. On infrastructure spending: This is something Trump has referred to but has not provided many details.
He has alluded to a package that would be $1 trillion, but it is unlikely that a Republican Congress would
actually support such a big fiscal package (remember: most Republican members in Congress are still
fiscal conservatives). Even so, we should see something on this front, if not of the magnitude that he has
referred to.
3. On Obamacare: Trump has also said he will “repeal and replace” Obamacare but has not given any
specifics on what that would look like. This has been a priority for the Republicans in Congress, and since
the republicans now control all the levers of power, we should expect this to be an early priority in 2017.
This has given the healthcare sector a major boost, which will be very good for the Nedgroup Global
Equity Fund, which is heavily weighted in this sector.
4. On tax reform: Tax reform is another area where Trump has provided some (but not many) details. His
individual tax reform plan looks very much like Paul Ryan’s, and his corporate plan is likely to look
increasingly like that of the Congressional Republicans too. Tax reform – corporate and individual – are
priorities for the Congressional Republicans and we should expect tax reform, although complicated, to
also be a priority in 2017.
5. On Janet Yellen: Yellen’s term is up in February 2018 and we won’t know whether she would step down
before then. Trump does not have the ability to remove her before her term is up but it is very unlikely that
he would re-nominate her.
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Overall, we expect the momentum in the US economy to continue. We expect modest growth in 2017 and a
modest pick-up in inflation. In terms of monetary policy, we think the result and market reaction does little to alter
the chances of a December US interest rate hike. On the one hand, Trump’s victory will add to uncertainty and
potential market volatility, but on the other, his plans for tax cuts and infrastructure spending could add to
inflationary pressures. In fact, the one asset class that has seen outsized moves today have been US bonds,
which have fallen on precisely this point.
Most importantly, the overall impact of today’s market moves on client portfolio values has so-far been very
muted, ranging between 0% and -0.6% depending on the risk profile and base currency.
Nedgroup Investments (IOM) Limited regulated by the Isle of Man Financial Services Authority.
Nedgroup Investment Advisors (UK) Limited (reg no 2627187) is authorised and regulated by the Financial Conduct Authority.
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