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  1. Wealth
November 9, 2016

The US election result: The City Reacts

By Spear's

As the world wakes to the prospect of a Trump presidency we feature reaction from the City and the private client world.

Jonathan Bell, CIO at Stanhope Capital –

‘Soft Trump or Hard Trump?

I never believed Obama’s election slogan “Yes We Can” – in the end he was only able to achieve a fraction of what he had hoped to achieve. Equally, Trump will not “Make America Great Again”, but neither will he accelerate the decline of America’s hegemony. In the short term, following some overnight volatility, markets have barely moved. The dollar is only marginally weaker and the US future is indicating a fall in the S&P 500 of just 1.5 per cent. Given that we know little of what policies will actually be implemented over the coming years, this cautious, but muted, reaction is justified.

The likelihood of tax cuts under Trump should be positive for US equities. We should also see legislation designed to encourage companies to repatriate money which could be used for investment, share buy-backs or dividend payments. Trump is also talking about increasing defence and infrastructure spending.

However, the future for long-term interest rates remains key to understanding the direction of asset prices. In the short term, expectations of an interest rate hike in December have reduced and this may be viewed positively by equity markets, but we still expect interest rates to rise in 2017 and are concerned that inflationary pressures could result in a significant rise in bond yields (Trump has also made some disconcerting comments regarding a lack of commitment to debt repayments that may eventually spook markets). For this reason the beneficial impact on equity prices of a fiscal boost could be offset by caution regarding the outlook for bond yields.

In terms of equity sectors, healthcare stocks have bounced this morning, in relief that Hillary Clinton will not be targeting healthcare pricing (the sector had underperformed over the past year in anticipation of a Clinton victory). Construction companies and others able to benefit from increased infrastructure spending should also react well to the news, as will companies with large offshore cash deposits. The defence sector could also be a beneficiary and financials may benefit from loosening of the Dodd-Frank regulations.

We have been concerned with the slowdown in global trade for some time. Trump’s success, coupled with June’s Brexit vote, are steps on a road to greater trade protectionism; which is perhaps one of the biggest threats to global growth. Trump’s policies will almost certainly be negative for Mexico, but they could also damage growth in China and other emerging markets.’

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Kenny Fisher, Currency Analyst, OANDA –

Wild, Wild Ride for Euro. EUR/USD is showing gains on Wednesday, in a session marked by sharp volatility. Currently, the pair is trading at the 1.11 line. The pair has taken traders on a roller-coaster ride, surging as high as the 1.13 line, before sharply reversing directions and dropping below the 1.11 level.

With global markets in shock after Donald Trump’s election victory, EUR/USD remains unsettled. The US dollar plunged in the Asian session after news that Trump was on his way to victory, as EUR/USD jumped over 300 points. However, the dollar has bounced back in the European session, recovering most of these losses. As Clinton was widely expected to cruise to the White House (a Reuters release on Monday said that Clinton had a 90 percent chance of winning), the equity and currency markets are in turmoil as the unthinkable has become reality. Trump’s victory speech was diplomatic and conciliatory, helping the markets to start to settle down after a tumultuous Asian session.

The news of a Trump electoral victory also shook up the odds of a December rate hike by the Federal Reserve. The odds dropped as low as 40 percent earlier in the day, but have recovered and actually increased. Currently, the markets have priced in at quarter-point hike at 76 percent, up from 71 percent just prior to the election. We could see further movement in the odds in the aftermath of the Trump victory, but it’s looking quite positive for a rate hike, which would mark the first rate move by the Fed since last December.

Naomi Heaton, CEO at London Central Portfolio Limited –

‘It is London Central Portfolio’s view that there will be a net positive impact on the UK housing market as investors retrench to blue-chip tangible assets as uncertainty on the political and economic stage is heightened once again.

Jitters in global equity markets driven by widespread speculation will be countered by flights to safety, with gold, the Yen and Swiss Franc set to benefit. Whilst the result will likely move the global spotlight away from Brexit, repercussions may be felt across Europe with the prospect of anti-establishment votes becoming keener. At the same time, the likelihood of the UK Parliament thwarting the people’s mandate to exit the EU has dwindled.

Whilst all of this plays out, central London property, a traditional safe haven, is expected to benefit from a similar flight to quality, asset-backed investments.’

Peter Elston, CIO, Seneca Investment Managers –

‘Economic growth tends to be inversely related to economic inequality. If President Trump can fulfil his promises to America’s lower income groups then there might be a case for becoming more positive on America’s – and thus the world’s – longer-term growth prospects. This means that while there will no doubt be a negative response from financial markets to Trump’s victory in the short-term, they could quickly recover. But this is far from certain, particularly since the Republican Party is traditionally the party that favours higher earners.

This result, like Brexit, appears to reflect deep discontent among large swaths of the electorate that the so-called establishment on both the left and the right chose to ignore. Income and wealth inequality has been rising across the globe, and many of those affected have associated this with immigration policies that they think are broken. Both Clinton and Cameron were guilty of failing to grasp this.

What a Trump presidency will look like is hard to say, given that the campaigning focused so little on policies. Is Trump really as vindictive as many believe he is or will he turn out to be an effective dealmaker and unifier? He has certainly played a blinder of a hand, no doubt helped by widespread distrust and dislike of his opponent.’

Justin Oliver, deputy CIO, Canaccord Genuity Wealth Management –

‘While the stock-market reaction has been as expected, it is important not to panic.

Trump isn’t totally insane.  Yes, trade wars are more likely – labelling China as a currency manipulator is not going to be helpful – and political certainty has clearly reduced markedly in the past 24 hours.

There are longer-term concerns regarding Trump’s economic policies – not least the expectation of significantly increased spending and reduced taxes. This unfunded fiscal stimulus appears to set the US on a worrying path of increased debt accumulation.  In the short term, there will likely be an economic simulative effect, which could be viewed as good news.  Short term gain, long term pain may be an appropriate way of describing this. And this has worrying implications for US Treasury prices.

Looking past the knee jerk reactions of equity markets, it is possible to make a case for stockmarkets moving higher for a period – reduced regulation, lower corporate taxes, faster economic growth in the short term are all positive factors fundamentally.  And of course, where there is weakness, there are buying opportunities.

Monetary policy is also a wildcard. Given past rhetoric, it seems unlikely that Janet Yellen will continue as chair of the Federal Reserve past next year, and an interest rate hike in December is now far less of a certainty. Faster growth but potentially looser monetary policy could pull in both directions for the US dollar, but the sense at this stage is that the dollar is likely to experience weakness.’

Christian Stadler, Warwick Business School, Professor of Strategic Management –

‘Trump’s victory brings a similar uncertainty as Brexit did. We simply don’t know which of his campaign promises will translate into policy.

For UK business it is a particularly big threat as trade with Europe is likely to decline as a result of Brexit, so companies have to offset business losses, but the US will also be a more difficult place to trade with.

Trump has spoken out against free trade, so expect a dramatic rise in import duty in some industries, such as steel.

The negotiations on TTIP are likely to end. As the UK will no longer be in the EU this will not have a direct effect, but suggests that it will be difficult for the UK to negotiate a deal with the US.

We can expect substantial investment in US infrastructure, but this is not likely to benefit UK companies as contracts are likely to go to US companies.

So what should UK companies do? There are two options: first, reduce US business and look for alternatives – this could mean a deliberate decision to shrink. Or set up subsidiaries in the US, so if a company operates in the US it won’t be affected by the new trade barriers.

Another effect for UK businesses is that it could be more difficult to get work permits in the US for UK business people.’

Nick Ford, manager of Miton’s US Opportunities Fund

‘Any “knee jerk” sell-off as a result of Trump’s victory is likely to be fairly short lived because the underlying fundamentals of the US economy appear to be improving. We suspect there is a considerable amount of money on the side lines that will be looking to “buy the dip”.

Sectors that should do well once the dust settles include financials and consumer cyclical stocks. Trump is known to have opposed further regulation of the banks which have recently had to curtail lending following more onerous capital requirements during President Obama’s tenure. Any sense that capital ratio requirements might be relaxed could give the sector a shot in the arm. Trump’s plan to reform the tax code and aggressively cut both individual and corporation taxes should boost consumer spending and business investment assuming he can come up with a credible plan to finance his proposals. This is a good backdrop for retailers and restaurants which would also escape Clinton’s plans to raise the minimum wage which is paid to many employees in the sector.’

Philip Smeaton, chief investment officer at Sanlam Private Wealth (UK)

‘Trump is the wildcard president and one that few investors will be welcoming this morning. Trump’s policies would likely see a destabilised financial system and damaged international trade relationships. It’s not all doom and gloom though – Trump’s pro-business taxation policies may mitigate some of the damage done to the wider economy.

‘In these times of economic uncertainty it is easy to get swept up in the headlines and look to find simple answers for what are, in reality, complex situations. We can speculate on the market impacts of macro events like the US election, but the reality is that most often they will have less long term impact than some would have you believe. The important thing is to ensure that any investments are well diversified to minimise the impact of any immediate market fluctuations.’

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer –

‘The US economy and the dollar are well-positioned to digest a Trump win

Higher inflation and most likely higher growth will be the result of Donald Trump becoming the next US President. The little that is known about his economic agenda includes tighter trade and immigration policies, which will put upwards pressure on prices. Further, most likely debt-financed tax cuts and more public spending have the potential to push growth higher. The uncertainty regarding the detailed agenda could have some short-term and very limited unfavourable effects on economic activity.

However, this uncertainty will diminish gradually. The initial negative reactions of the US dollar should be short-lived as well, as the election outcome is actually strengthening the case for rate hikes by the US Federal Reserve once the fuss around the new US President subsides. We expect EUR/USD to strengthen to 1.14-1.15 in the coming days before starting to weaken again.

The negative impact on the US economy and the US dollar of a Trump win should be short-lived.’

Will Hobbs, Head of Investment Strategy in UK & Europe, Barclays Wealth and Investment Management –

‘Donald Trump has been confirmed as the 45th President of the United States. Investors are currently running scared, with perceived safe havens such as treasuries and gold finding plenty of support and equity markets finding little. Naturally, we can’t predict when this dust will settle, but when it eventually does, we expect markets to remember that there are good reasons for believing that little of President Trump’s campaign trail rhetoric will make it to actionable policy.

Superficially, the congressional make-up looks to be one that would support the president, with the Republicans retaining control of both the Senate and the House of Representatives. However, the reality is likely somewhat different following a bruising and divisive campaign characterised by Mr Trump falling out of favour with an important chunk of GOP (The Republican Party) representatives.

In any case, immediate action will likely be constrained by the laborious process of setting up a new administration. One commentator has suggested that as many as 4,000 political appointees must be selected, with some requiring Senate approval and most requiring security clearance. All of this has ensured over the last few decades that new cabinets have tended to be in place between February and May of the year following the election, but many of the other appointees didn’t make it into the seats before autumn the following year.

Even after this is all done, we see scant prospect of a dramatic policy shift in the wake of these elections. We’ve argued at length that campaign trail threats and promises are more likely than not to wilt in the face of a reluctant legislative branch – neither candidate looks to be the unifying figure that history tells us is necessary for words to become domestic policy. There is admittedly more scope for the President to use unilateral power with regards to foreign and trade policy.

However, the prospect of President Trump unilaterally applying tariffs to Mexico and China seems unlikely to us. The gap between fiery campaign rhetoric and actual policy implementation is routinely wide, and in this case we think that economic self-interest will prevail.

Investors remain likely better served by focusing on the fundamental backdrop to the US economy, rather than who presides over it. That backdrop continues to look encouraging for those who would lean their investment portfolios towards stocks and away from bonds as we currently advise.  The most reliable cyclical lead indicators are consistent with trend economic growth in the world’s most important capitalist economy. Meanwhile, the labour market is starting to more visibly tighten, with nominal wages finally starting to pick up a little more forcefully. Inflationary pressures are finally returning to the US economy, a factor which informs our belief that government bonds at current levels may offer more return-free risk than risk-free return.

As ever, there remains plenty to worry about for investors, with European politics now set to take centre stage in the form of the Italian referendum on constitutional reform. Nonetheless, we want to be careful of exaggerating the threats of bumps we can see in the road ahead, just because we can see them.

Diversification remains the best defence against that ever unknowable future. The simple act of showing up and getting invested remains the most profitable ‘theme’ to invest around – the forces of growth and inflation continue to be underestimated, albeit a little less than earlier in the year.

Neither the election of President Trump, nor (if it comes to pass) a ‘no’ vote in the Italian referendum, changes that belief – the highly evolved constitutional defences that have made change so difficult to effect in many developed world economies in the last several years may well prove a source of comfort for investors in the months and years ahead.’


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