17th November, 2016
Trump’s In, Let It Begin…
Where the people are voting for political estrange,
First Brexit, then Trump,
Next Europe to supply the bump,
Incomes haven’t risen, people aren’t heard,
It was only a matter of time until all this occurred,
It seems there will be a shift, from monetary to fiscal,
Infrastructure, tax cuts and possibly Yellen’s dismissal,
Whatever the policy, it should benefit working people,
With the ultimate aim of making everything more equal,
Will it succeed? No one knows yet,
One things for sure, no future is set.
At one point on 9th November, financial markets were preparing to open 5% lower. Enter “Brexit Playbook 2.0”, as initial panic gave way to increasing optimism. In what was one of the most astounding trading sessions ever, the US market went from -4.4% to 1.4% in the matter of hours. “Oh dear, we could be on the brink of World War 3” went to “mmm, cutting taxes could boost the economy.”
In fact, it is still pretty unclear which version of the new President will turn up on January 20th (that’s when he officially takes office), the brash, authoritarian who was there for most of the campaign trail, or the empathetic and considered fellow who turned up to thank Hillary Clinton on election morning. Given the complexity of the US political system, our first thoughts are that we will see a dumbed down version of the Trump political agenda. The Great Wall of Mexico and the crazy immigration policies will be voted against (even by his own party), with the more mainstream; namely tax cuts and infrastructure spending; forming the focus of the next administration.
Theoretically speaking, these should lead to better economic prospects for the US. Less tax on individuals and businesses “should” stimulate more spending and business investment. However, confidence is a big factor. With the little bit of extra pocket money, people will face the choice of spending more, or paying down their mortgage and credit cards. Given last week’s rioting and the scale of concern across the world, I would say the big man has a long way to go before he instils the confidence needed to get everyone spending.
In addition, Donald has set out quite a protectionist agenda. He would like to scrap or amend some of the US’ key trade deals and impose tariffs on Mexico and China. Neither are good for overseas relations. The potential effects of this type of policy could counter his drive to stimulate internal economic growth, likely creating inflation and further uncertainty instead.
To summarise, no one – including Mr Trump – knows for sure what he will be able to do in the next four years. He has campaigned for revolutionary policy, but the outcome is likely to be a heavily watered-down version of his rhetoric. Economic progress will depend on the trade-off between growth-improving tax cuts and infrastructure spending, and the negative effects of policy uncertainty and poorer foreign relations. A redistribution of wealth and improved equality doesn’t seem a likely outcome either way.
Turning to the portfolios, Trump’s victory has not changed our current investment views. We remain cautious in the short-term, mindful that political events play an increasingly influential role in market sentiment and investor behaviour. There remain plenty of scope for political surprises. Over the next 18 months or so we have an abundance of European events that could tip the balance on the long-term prospects of the Eurozone. This starts with the Italian vote on reform on 4th December, so expect markets to quickly turn their attention to this event next. We will of course keep a very close eye on proceedings, avoiding the risks for now but picking up the subsequent opportunities as and when they are presented.