The potential economic impact
As we discussed last month, Trump’s intentions for fiscal, trade, and immigration policies will all impact markets, and a clean sweep across Congress in addition to the president’s executive power makes real policy change easier.
Trump has touted aggressive tariffs on international trade to boost domestic economic output through re-shoring. If realised, these tariffs would have an impact on economies around the world and reflect the theme of a more fragmented global economy which we have discussed before. Protectionist policies like tariffs are seen as both domestically inflationary and inhibiting global growth.
Fiscally, an already stretched deficit of 7% of GDP looks set to increase further thanks to lower tax receipts, with implications for future borrowing costs as investors challenge the sustainability of this approach, despite Trump’s emphasis on domestic economic growth. In addition, intended tighter immigration controls suggest stickier wage growth in the medium term which also could influence the Federal Reserve in slowing the pace of interest rate cuts, although we still expect a 0.25% cut at today's meeting.
What it means for markets in the short term
Even though markets had grown more confident of a Republican win in recent weeks, US stock markets have reacted positively to the result, led by companies in the financial, industrial and consumer sectors. As we anticipated, the Trump victory has proven less of a shock to markets than 2016, when there were sharp falls before a strong recovery. Moves higher are based on optimism for corporate earnings, fuelled by expectations of lower taxes and a lighter regulatory environment. It remains to be seen if this outlook is dented by longer-term concerns for global trade.
The election result has also reaffirmed the strength of the US dollar, not least in highlighting some of the economic weakness seen in other major markets, and the expectation for looser monetary policy elsewhere. Bond markets have long been more wary of a Trump victory, and US Treasuries have been noticeably weaker. In particular, longer-dated bonds are discounting more inflation and the likelihood of greater bond issuance, steepening the yield curve.
In contrast, the corporate market is proving more resilient. European bonds have also been boosted by the belief that a Trump administration will alter the dynamic for the continent’s industrial and manufacturing growth, trade policies and foreign policy concerns on top of the region’s various domestic concerns.
How we are positioned – the impact on portfolios
As with all major global events, whether economic, market, or societal our focus is on investing for the long term. We don’t make rash decisions based on potential or actual outcomes, preferring to construct portfolios to withstand a range of environments, but evolving our allocations with a range of market drivers. After all, we have seen before how the initial market reaction to political events is not always a long-lasting one.
We don’t expect to make immediate changes to portfolio positioning based on the election result, in part as markets had been increasingly discounting the news over the past month. Portfolios look set to benefit from the exposure to the US stock market, and the dollar more broadly – even though both could be seen as expensive compared to historic levels. However, we are challenging our prior assumptions on markets outside of the US.
Will the fallout from US politics have a negative impact on the fundamentals internationally? In fixed income, the decision to allocate to inflation-protected treasury bonds is rewarded compared to regular government bonds, and we are also positioned to benefit from a steeper yield curve. Corporate bond holdings are also performing better, but we have been reducing the allocation to these throughout the year. We prefer to focus exposure to the administration’s agenda for economic growth through equities, where upside is more clear.
You can find out more about how our key beliefs inform our thinking and also read about our investment approach in detail.
Please note, the value of your investments can go down as well as up.
