It’s been just over a week since the U.S. election and there is much to digest as the world considers the investment implications of a Trump presidency. Fiscal and monetary policy, trade, and regulation are top of mind for investors. Jim McCaughan, CEO, Principal Global Investors, comments on what a Trump presidency might mean for investors and world markets:
Markets have had a week to digest the news – will that be all of the impact?
What happened immediately after the election result became clear was highly technical in the sense that it was driven by trading patterns. It’s been right for a long time to buy the dips on U.S. equities. There was massive buying of the dips on the Futures Market overnight.
The next day, those who had hedged against a Trump victory, which many had, thinking it would lead to disarray in the equity market, hurriedly had to close those hedges. And that’s really what pushed the market up. It wasn’t really a verdict on the Trump presidency. It was technical.
Having said that, what will the market’s verdict on a trump presidency be? It’s very uncertain. On the one side, we could see tax reductions all round, a fiscal stimulus primarily through infrastructure, which could boost the economy near term and drive interest rates up. On the other hand, we could see deportations, trade agreements being torn up and the abolition of the affordable care act, which could be very negative for the economy. At this stage, we just don’t know.
Both the Trump future administration and the Republicans in Congress had been pretty clear about their objectives for tax cutting and for elimination of certain deductions. That, if the promises are kept to, would be quite a significant Keynesian stimulus on the economy, which is one of the reasons for concerns about inflation moving forward.
On the one hand, it could be a very positive economic policy like the Reagan tax cuts, which in the end, did stimulate sustained growth for a while. Or, it could lead to higher interest rates choking off recovery with a recession in 2018. For the time being, the US economy will do ok, but we need to be watching the signs for 2018 and beyond.
Thoughts on the Fed and monetary policy:
This will be the first time that we’ll have a fiscal stimulus at a point where the economy is arguably pretty close to full capacity. If more jobs are generated, it’s not clear who will do them and that could mean that the stimulus turns out being inflationary, rather than pro-growth.
The stimulus could turn out to be self-feeding, like the Reagan stimulus did. Alternatively, it could lead to higher rates choking off economic growth and leading to a recession in 2018. Either is possible and we need to monitor carefully.
It’s not just Brexit and Trump – anti trade rhetoric and the rise of populism:
It’s possible [Trump] might fulfill his promise on tariffs, which could stop both ways on trade, slow down economic growth. That might be a possibility and potentially could bring on the earlier recession.
There’s now a much higher probability of markets going to anti-trade populists in elections next year in France, in Germany and in the Netherlands. And of course the Italian constitutional referendum could go against the Renzi Government. If you add that all up, there’s a chance that this anti-trade movement becomes much more global and that would mean that you’d see declining production, declining economic activity and ultimately more unemployment. That is something that is legitimate to fear.
The implications for asset allocation:
· 10-year bond yields remain attractive
· Expect the U.S. dollar to stay quite strong – potential to see parity against the Euro in the next few months
· Capital being “sucked in to the United States” is bad news for emerging markets, which are much more at risk from any decline in trade
· Worldwide demand for commodities is not likely to be particularly strong
· U.S. equities are favoured over foreign more than before.
– Principal Global Investors CEO, Jim McCaughan
